By Gaurav Dogra

(Reuters) – Foreigners were net buyers of Asian bonds in May, helped by a drop in U.S. bond yields and a recovery in the region’s economic activity.

The bond inflows were in contrast to the outflows experienced by regional equity markets last month, however, the net purchases in Asian bonds were the lowest in four months due to worries over a resurgence of regional coronavirus cases.

Overseas investors bought a net $4.7 billion worth of Asian bonds last month, the lowest since January this year, data from regulatory authorities and bond market associations showed.

Foreign flows into Asian bonds https://fingfx.thomsonreuters.com/gfx/mkt/rlgvddgbjvo/Foreign%20flows%20into%20Asian%20bonds.jpg

Foreigners purchased a net $5 billion worth of South Korean bonds, marking a fifth straight month of inflows. That pushed the holdings of overseas investors in South Korean bonds to 8.3% at the end of May, the highest since at least 2014.

“Because of South Korea’s strong growth recovery and shorter timeline to policy lift-off, 10Y Korean bond yields have been trading at historically wide spreads to U.S. Treasuries and other peer EM low-yielders,” said Duncan Tan, a strategist at DBS Bank.

“Even on an FX-hedged basis, Korean bonds also continue to offer consistently high pick-ups over U.S. Treasuries.”

Foreign investors’ holdings in Asian bonds https://fingfx.thomsonreuters.com/gfx/mkt/oakpebywzvr/Foreign%20investors’%20holdings%20in%20Asian%20bonds.jpg

Malaysian bonds also attracted $453 million worth of foreign money, which was the 13th consecutive inflow.

On the other hand, Indonesia and Indian bonds faced outflows worth $501 million and $237 million, respectively.

Jennifer Kusuma, Asia rates strategist at ANZ, said she sees more room for foreign investor flows into the region, facilitated by improving global risk sentiment and as vaccination drives gather pace in a number of economies in Asia.

“For the region, the improved performance of Chinese asset markets may also develop into a fresh driver of strength. We expect better buying interest for LCY (local currency) bonds near term,” she said.

Yield spread between Asian gov bonds and US Treasury bonds https://fingfx.thomsonreuters.com/gfx/mkt/yxmpjaymqvr/Yield%20spread%20between%20Asian%20gov%20bonds%20and%20US%20Treasury%20bonds.jpg

(Reporting by Gaurav Dogra and Patturaja Murugaboopathy; Editing by Jacqueline Wong)

---