By Gaurav Dogra
(Reuters) - Emerging Asian bonds ex-China attracted the biggest monthly foreign inflow in over four months in December, shrugging off worries over the Federal Reserve's tightening of its monetary policy as businesses showed higher productivity.
Overseas investors purchased a combined net total of $4.72 billion in South Korean, Thai, Indian, Indonesian, and Malaysian bonds last month, their biggest net buying since August, data from regulatory authorities and bond market associations showed.
Graphic: Monthly foreign investment flows: Asian bonds, https://fingfx.thomsonreuters.com/gfx/mkt/egpbkjjkgvq/Monthly%20foreign%20investment%20flows%20Asian%20bonds.jpg The five countries' bond markets attracted overseas capital of $64.02 billion last year, the largest since at least 2013. South Korean bonds accounted for majority of the inflows, receiving $57.81 billion.
"Korean bonds were likely in demand because foreign investors could buy a low-beta bond, hedge out the currency exposure and still get an attractive 20-30 bps pickup over US Treasury", said Duncan Tan, a strategist at DBS Bank.
Indonesian and Indian bonds, by contrast, faced cross-border outflows of $5.7 billion and $1.4 billion respectively last year.
Graphic: Yearly foreign investment flows: Asian bonds, https://fingfx.thomsonreuters.com/gfx/mkt/klpykqqkypg/Yearly%20foreign%20investment%20flows-%20Asian%20bonds.jpg Foreign holdings of Asian emerging market bonds as a percentage of G4 central bank balance sheet sizes had fallen from 1.5% to 1.1% around the onset of the pandemic and have stayed at 1.1% ever since, DBS bank said in a report.
"In USD return terms, EM local currency bonds had one of the weakest performance in 2021" said DBS Bank's Tan.
Graphic: Asian currencies 2021 performance against the USD, https://fingfx.thomsonreuters.com/gfx/mkt/byprjmxazpe/Asian%20currencies%202021%20performance%20against%20the%20USD.jpg Meanwhile, Malaysian and Thai bonds saw inflows of over $1 billion each last month, while South Korean bonds received $5.56 billion on positive growth expectations.
However, analysts said the increasing expectations of aggressive policy tightening by the U.S. Federal Reserve would affect inflows into the Asian bonds in the first quarter of this year.
Investment banks such as Goldman Sachs, J.P. Morgan, and Deutsche Bank expect the Fed to raise interest rates four times this year. Graphic: Foreign investors' holdings in Asian bonds, https://fingfx.thomsonreuters.com/gfx/mkt/dwvkrkkrwpm/Foreign%20investors%20holdings%20in%20Asian%20bonds.jpg
(Reporting by Gaurav Dogra and Patturaja Murugaboopathy in Bengaluru)