Economics

DBS Flash
Asia Rates: Flows, Positioning & Valuation (June 2022)
Strategy/Rates

DBS Group Research June 23, 2022

30
Duncan Tan Bond Flows
Rates Strategist
• A pullback in USD rates and the USD were
key to stabilization in Asia govvies in May

• Bond flows likely to worsen in June on

frontloading Fed and market volatility.

Fund Positioning
Eugene Leow
Senior Rates Strategist • EM bond funds remain underweight Asia.

• Key underweight positions continue to be

in THB and CNY duration.

• Looking ahead, we expect fund managers

to stay bearish Thai duration but could
pare back underweight CNY positions.

Please direct distribution queries to Bond Valuations

Violet Lee +65 68785281 violetleeyh@dbs.com

• 10Y Malaysia and Indonesia bonds screen

as slightly cheap while China and India
bonds screen as rich.

Equity Flows

• Broad foreign outflows across Asian

equities with onshore Chinese equities the
notable exception.

Refer to important disclosures at the end of this report.

Asia Rates: Flows, Positioning & Valuation (June 2022)
Charts and models are at the end of the report.
Market sentiments towards EM bonds are likely to
have taken a hit from the Fed's upsized 75bps hike
and significant upward revisions to forward rate
projections. The expected timings of peak Fed
hawkishness and peak US Dollar strength have likely
been pushed further out. Volatility in global equity
markets and heightened stagflation worries are also
negative for risk appetite. Except for bonds of
specific EM economies which are more advanced in
their hike cycles and have significant macro buffers,
international bond investors are likely to hold a
cautious and neutral-to-underweight stance
towards EM bonds in the near-term. In this month's
FPV report, we take stock of the latest Asia bond and
equity flow trends and reassess valuation and
positioning metrics to see if we could be moving
closer towards eventually turning bullish on Asia
bonds.
Bond Flows – Stabilization in May; Large outflows
expected for June
The pullback in US rates and broad US Dollar were
key to the stabilization in Asia government bonds in
May and several bond markets saw some
improvement in flows from the sizable outflows in
March-April. Foreigners reduced holdings of
Indonesia bonds by USD0.8bn in May, a smaller
reduction than the USD1.2bn seen in April and
USD2.9bn in March. Across India FAR and non-FAR
bonds, there has also been a similar moderation in
foreign outflows (foreign holdings fell by a smaller
USD0.4bn in May). Direction of change in foreign
ownership of Malaysia MGS/MGII bonds turned
positive in May with a small increase of USD0.1bn.
South Korean bonds saw its streak of rising foreign
ownership extend for a seventeen straight month -
USD1.5bn increase in KTB holdings coupled with a
USD0.3bn increase in MSB holdings.
June 23, 2022
Deviating from the regional trend, China bonds did
not see an improvement in flows in May. Foreign
outflows stayed large, primarily due to a wide
USD11.2bn decline in foreign ownership of PBBs.
Foreign holdings of CGBs actually fell by a smaller
USD2.1bn, compared to the April's fall of USD6.5bn.
Foreign appetite for China bonds were likely
subdued back in May, due to the considerable
uncertainty around the duration and impact of
COVID control measures on economic activity. CNY
volatility likely also contributed as we believe most
foreign investors consider China bonds on an
unhedged basis.
Outside of Indonesia and India bonds (foreign
ownership data are available at daily frequencies),
data for the rest of Asia government bond markets
are typically on a monthly basis and published
around one to two weeks after month-end. Though
we do not yet have the data for June, we can
reasonably expect flow trends into Asia government
bonds to worsen in June, with the possible
exception of Korea KTBs/MSBs which could benefit
from some safe haven demand.
Fund Positioning – Still underweight Asia
Coming into June, EM bond funds remain broadly
underweight Asia. Amongst the larger country
weights, for bond exposures, fund managers'
biggest underweight continues to be in Thailand
(2.0% UW), followed by Malaysia (0.5% UW) and
Indonesia (0.5% UW). For currency exposures, fund
managers' biggest underweight remains the CNY
(2.7% UW), followed by THB (1.1% UW). Fund cash
levels decreased further to 3.63%, from 4.83% in
April and 5.86% in March.
Looking ahead, we expect EM bond funds to
maintain a large underweight in Thai duration
because Thai bonds offer one of the lowest yields in
the EM universe. From a positioning perspective,
the large underweight in Thai duration can be seen
as a positive as it means that there is scope for fund
managers, at some point in the future, to buy more
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Asia Rates: Flows, Positioning & Valuation (June 2022)
Thai bonds to neutralize their underweight position.
But for that positioning tailwind to materialize, we
would need the Bank of Thailand to deliver multiple
hikes and / or a rapid tourism recovery. On the other
hand, we expect EM bond funds to start reducing
their large underweight in CNY, primarily on the
back of improving COVID situation and more
optimism around China's economic outlook.
10Y Asia Bond Yield Valuations – Higher US real
rates weigh
Based on our Yield Decomposition Approach (YDA),
excess risk premia (valuation buffer) embedded in
10Y Asia bonds are extending their declines into
June. As has been the case for much of 1H, higher
US real rates were the key drag on valuation buffers
in June (10Y US real yields jumped ~45bps). Rising
inflation expectations have also been consequential
for Thailand and Korea bonds, likely because of the
larger upside inflation surprises in both economies.
For higher-yielders like Malaysia, Indonesia and
India bonds, excess risk premia have been materially
compressed by market repricing of sovereign credit
risks. Global market volatility and drawdowns in
June are likely leading to wider credit differentiation
between lower-rated vs higher-rated bond issuers.
Our YDA approach suggests that 10Y China bonds do
not offer a positive risks premia and valuations
remain the richest in Asia. 10Y South Korea bonds
have joined India bonds in screening slightly rich. On
the other hand, 10Y Malaysia and Indonesia bonds
are still slightly cheap and offer some value.
Comparing with our ARVI metrics, both YDA and
ARVI agree on 10Y Malaysia and Indonesia bonds
being slightly cheap. On the other hand, both YDA
and ARVI agree on 10Y China and India bonds
screening quite rich. At present, Asia bond
valuations are clearly far from very cheap levels that
could warrant turning bullish based solely on
valuation considerations. In 2H, we either need to
see macro fundamentals improve or higher Asia
bond yields for valuations to rebound.
June 23, 2022
Equity Flows – Broad June outflows; Chinese
equities the exception
Market volatility in June, driven by worries around
aggressive DM rate hikes and a stagflationary global
outlook, have drawn broad foreign outflows across
Asian equities. South Korean equities are seeing
renewed foreign selling pressures, with month-to-
date net sale of USD4.3bn. Large outflows from
Indian equities persist for a sixth straight month,
with foreigners having net sold USD5.2bn so far in
June. On a month-to-month basis, foreigners are net
selling Thailand (USD0.8bn) and Malaysian
(USD0.2bn) equities for the first time in 2022.
Indonesian equities have been relatively resilient,
seeing small month-to-date foreign outflows of
USD0.1bn.
Onshore Chinese equities have been the notable
exception - USD6.5bn of net purchases in June by
offshore investors via Northbound Stock Connect is
a large step-up from the USD2.5bn seen in May.
Sentiments towards Chinese equities are likely
being boosted by the improving COVID situation and
the recent slew of growth support measures
announced by policymakers.
Charts and models are on the following pages.
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Asia Rates: Flows, Positioning & Valuation (June 2022) June 23, 2022

Asia Bond Flows

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Asia Rates: Flows, Positioning & Valuation (June 2022) June 23, 2022

EM Bond Fund Positioning

We track positioning across 15 of the largest EM bond funds by comparing their bond and currency exposures
against respective benchmarks. As of March 2022, aggregate fund size is USD30bn.

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Asia Rates: Flows, Positioning & Valuation (June 2022) June 23, 2022

10Y Asia Bond Yield Valuations

Asia Rates Valuation Indicator (ARVI)
ARVI benchmarks Asia-US nominal yield differentials against macro factors such as Asia-US inflation
differentials and Asia external funding needs (current accounts). Fundamentally, the model works on the bas is
that higher Asia inflation and weaker Asia current account balances would need to be compensated by higher
Asia bond yields. Primer - Introducing the Asia Rates Valuation Indicator

Yield Decomposition Approach (YDA)

By estimating the level of excess risk premia embedded in Asia bonds, and comparing against its own historical,
YDA assesses if Asia bond valuations are rich or cheap. From 10Y Asia nominal bond yields, we subtract 10Y US
real yields (real risk-free rate), 12-months ahead domestic inflation consensus forecast (inflation) and 5Y
sovereign CDS spreads (sovereign credit spread). The residuals would then represent excess risk premia,
compensating Asia bond investors for idiosyncratic and currency depreciation risks. To judge if excess risk
premia are high as a direct result of greater expectations of Asia currency depreciation, we express our
estimate of excess risk premia as a ratio over Asia FX vols.

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Asia Rates: Flows, Positioning & Valuation (June 2022) June 23, 2022

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Asia Rates: Flows, Positioning & Valuation (June 2022) June 23, 2022

Asia Equity Flows

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Asia Rates: Flows, Positioning & Valuation (June 2022) June 23, 2022

Group Research
Economics & Macro Strategy

Taimur Baig, Ph.D.

Chief Economist
Global
taimurbaig@dbs.com

Chang Wei Liang Ma Tieying, CFA

FX & Credit Strategist Senior Economist
Global Japan, South Korea, Taiwan
weiliangchang@dbs.com matieying@dbs.com

Nathan Chow Radhika Rao

Senior Economist Senior Economist
China, Hong Kong SAR Eurozone, India, Indonesia
nathanchow@dbs.com radhikarao@dbs.com

Chua Han Teng, CFA Irvin Seah

Economist Senior Economist
Malaysia, Philippines, Thailand, Vietnam Singapore
hantengchua@dbs.com irvinseah@dbs.com

Violet Lee Daisy Sharma

Associate Analyst
Publications Data Analytics
violetleeyh@dbs.com daisy@dbs.com

Eugene Leow Duncan Tan

Senior Rates Strategist Rates Strategist
G3 & Asia Asia
eugeneleow@dbs.com duncantan@dbs.com

Chris Leung Samuel Tse

Chief Economist Economist
China, Hong Kong SAR China, Hong Kong SAR
chrisleung@dbs.com samueltse@dbs.com

Philip Wee
Senior FX Strategist
Global
philipwee@dbs.com

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Asia Rates: Flows, Positioning & Valuation (June 2022) June 23, 2022

Sources: Data for all charts and tables are from CEIC, Bloomberg and DBS Group Research (forecasts
and transformations)

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