Red flag waves as demand wanes at Southeast Asia bond auctions

Waning demand at recent debt sales suggests next quarter is going to be a difficult one for Southeast Asian bonds.

Bidding at Indonesian and Malaysian auctions has fallen to the lowest levels in at least five months, while the Philippine government rejected all bids at two offerings over the past month as investors sought higher yields than the nation was prepared to pay. Only Thailand has so far bucked the trend, with fears over a resurgence in coronavirus infections boosting haven demand.

There are plenty of factors contributing to the worsening bond-sale metrics. These include speculation local investors are getting close to filling this year’s order books, signs the cycle of interest-rate cuts is nearing its end, the specter of debt monetization, and the re-emergence of political risks.

Taken as a whole, these developments suggest the rally in Southeast Asian bonds following the initial outbreak of the coronavirus is starting to look like it may be over. If dwindling demand at debt sales is anything to go by, the downturn may be set to gather pace as the fourth quarter begins.

Here’s a look at how auctions have been faring in each of the four main regional bond markets:

INDONESIA
Demand at a sale of Indonesia’s conventional bonds on Tuesday slid to the weakest level since April, indicating the support from onshore investors that has underpinned the market in recent months looks to be fading.

Global funds have turned net sellers again, with outflows of $350 million in September, the most since they offloaded $7.5 billion during the selloff in March. The proportion of the government’s bonds owned by foreign investors has dropped to about 28%, from as high as 39% in January.

A proposal in parliament earlier this month to curb Bank Indonesia’s independence, and talk of the monetary authority helping to finance the government’s budget deficit until 2022 have both spooked foreign investors. Efforts from the finance minister and central bank governor have so far failed to allay these concerns.

MALAYSIA
Malaysian bonds have been the best performers in emerging Asia this quarter amid optimism over further rate cuts, but the euphoria seems to be fading. Demand at the two most recent conventional bond auctions—for 7- and 20-year debt—slipped to the lowest this year, signaling investor appetite may be topping out.

Traders have now trimmed bets on further policy easing after September’s central bank meeting, with swaps pricing in no change for the next 12 months. At the same time, political risks have re-emerged, with opposition leader Anwar Ibrahim saying this week he has the backing of enough lawmakers to form a new government. Uncertainty over foreign inflows has also been been prolonged after FTSE Russell said Thursday it would keep the nation’s debt on a watchlist for possible exclusion from its world bond index.

THE PHILIPPINES
Yields in the Philippines have been climbing from record lows set in August due to a combination of record retail bond sales, the start of debt issuance from the central bank, and concerns over the fiscal shortfall after the government raised its deficit ceiling until 2022.

Onshore investors are demanding higher yields at debt sales to compensate for the rising risks. The government responded by rejecting all bids at an auction of 2033 bonds on Aug. 25, and did the same for a 10-year offering on Tuesday. Bid yields for the 2033 tenor were “way too high” compared with valuations, Treasurer Rosalia de Leon said.

THAILAND
While yields have been rising in the rest of the region, they are falling in Thailand. Haven demand has been boosted by reports of the first locally transmitted virus case in 100 days, the sudden departure of the finance minister after only a month in the job, and growing anti-government protests.

An auction of 2038 securities on Sept. 9 drew a bid-to-cover ratio of 3.91 times, and a sale of 2029 debt a week later saw one of 3.95 times, both well above this year’s average of 2.5 times. Also supporting bonds has been the prospect of another rate cut, with baht swaps pricing in more than half a 25 basis-point reduction during the next six months.

WHAT TO WATCH

• Malaysia will release trade data on Monday after exports rose for the past two months

• Thailand’s balance of payments figures are due Wednesday, with July registering the largest current-account surplus in five months

• The Philippine central bank is expected to maintain policy rates on Thursday

• Indonesia will publish inflation numbers on Thursday, after August’s reading dropped to the lowest in more than two decades

— Marcus Wong/Bloomberg

Note: Marcus Wong is an EM macro strategist who writes for Bloomberg. The observations he makes are his own and not intended as investment advice.