Sovereign sales around the region have cooled. At the end of August, Malaysia's 2046 bond sale drew a bid-to-cover of 1.63 times, marking this year's second-weakest take-up. Thailand's Sept. 2 sale of 2036 securities came in at 1.13 times, the weakest cover for its 10 year benchmark since May.
In the Philippines, last week's 5 year auction produced the softest cover for that tenor since 2013. At Indonesia's conventional sale last week, total bids reached 66 trillion rupiah - or $3.77 billion - its weakest showing since the July 7 auction.
Borrowing costs have climbed across most of Southeast Asia this quarter as global rates firm and inflation sticks around. Malaysia's 10 year yield has risen by over 50 basis points, helped along by concern over increased long-maturity issuance and by bets that Bank Negara Malaysia will raise rates given strong growth. Ten-year yields in Thailand and the Philippines are higher by roughly 20 basis points and more than 40 basis points, respectively.
Oil is a headwind too. With Brent above $100 a barrel, the burden of pricier fuel for net importers such as Thailand and the Philippines is curbing appetite for bonds.
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The latest inflation readings point to the risk that markets are underpricing price pressures. Thailand's August inflation increased 2.53% from a year earlier, surpassing economists' forecasts, something that hadn't happened in four months. Indonesia's August print accelerated to 3.19% year on year, also hotter than expected. That mix can push yields higher as investors pare back easing hopes and seek more compensation.
The gap between steady regional growth and shaky short term sentiment is exactly what some big buyers like to see. Desmond Fu, who leads investment management at Western Asset Management, said, "The region benefits from strong domestic sponsorship, but longer-dated bonds remain exposed to global term-premium shocks and heavy issuance." He added, "We prefer short- to intermediate-maturity bonds and would use weak auctions as opportunities to enter at better yields."
Aberdeen Investments investment manager Fesa Wibawa echoed that backdrop: "Recent weakness primarily reflects a more challenging external environment rather than a broad deterioration in Southeast Asian fundamentals," adding, "Current volatility should ultimately create more attractive opportunities within Southeast Asian rates and currencies."
If you are watching yields, this is the kind of messy market that can offer better entry points, especially where local demand is strong but auction covers look soft. The caution flag is on longer maturities, which are more sensitive to global term premium and heavy issuance. Shorter to intermediate tenors are where some managers are focusing while they wait for the macro fog to thin.
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