Bonds to benefit from calm – Barclays

MANILA, Philippines - The bond market is likely to benefit from the calm in the financial markets with investors expected to prefer “safer” investment  instruments once they return to Asia, an investment bank said.

For the first time in more than two weeks, British bank Barclays said investors have shifted to buying mode in Asian markets, as fears of US’s trimming down stimulus measures later this year recede.

“Going forward, we expect more of the same: bonds performing in line with the risk indicators as we think investors will likely to get back into safer markets first,” the bank said in a research note.

On Tuesday, Barclays noted bonds from India, Malaysia and Thailand benefitted from huge inflows, followed by those in South Korea, Singapore and Indonesia. There was no mention of the Philippines in the report.

The performance of regional bonds, the bank said, could be partly attributed to the participation of local investors in the market, which cushions outflows coming from the flight of foreign placements.

Even then, Barclays said there has been some “resilience” in the bond market even during the financial turbulence driven by fears cheap money from the US – most of which flowed to emerging markets – would soon be gone.

“Even though external risks loom large, the resilience of institutional portfolio flows is encouraging and challenges the assumption that large foreign holdings of local government debt are the key to underperformance in a sell-off,” it explained.

On Friday, Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa Guinigundo said the market’s initial reaction to the possible end of quantitative easing has started to “subside,” indicating that the worst is over for the financial markets.

By Barclays estimates, the Philippine Stock Exchange index (PSEi), one of the world’s best performers last year, has already lost 16.5 percent of its value this year. It slumped by as much as 6.5 percent at the height of market volatility.

On the bond market, Barclays said 10-year Asian bond yields have risen by an average of 128 basis points.

“We expect bonds…to continue to do better even if volatility comes down,” the bank said.