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 bucked the trend, with fears over a resurgence in Covid 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 monetisation, and the re-emergence of political risks (in Malaysia).
 
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 in March.
 
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.
 
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.
 
Thailand
 
While yields have been rising in the rest of the region, they are falling in Thailand. An auction of 2038 securities on Septermber 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.