Foreigners turned net buyers of Asian bonds in July after three months of aggressive selling, but the escalating trade dispute between China and the United States and Turkey's economic crisis paint a gloomy outlook for continued regional inflows.
Data from central banks and bond market associations showed foreigners bought a net $3.02 billion of bonds from India, Indonesia, Thailand, South Korea and Malaysia in the last month.
South Korea and Malaysian bond markets led the region with inflwos of $1.3 billion and $984 million, respectively.
Efforts by the United States and Europe to resolve difference over trade propped up money flows in July, though investors are more worried this month, with another round of trade tariffs between China and the United States kicking off next week.
"We are just at the beginning phase of the trade war, and as tariff barriers rise they will pressure currencies for further weakness, and both these factors will pressure prices higher, thus further souring investor sentiment for the bond market," said Prakash Sakpal, Asia economist at ING in Singapore.
From Aug. 23, new US tariffs on $16 billion worth of Chinese goods would take effect, along with an equal amount of retaliatory tariffs from Beijing.
Angara's diplomatic rift with the United States has sent the Turkish lira reeling this month, also affecting other emerging-market currencies with large current-account deficits, such as the Indian rupee and Indonesian rupiah.
Analysts said currency crisis in Turkey has prompted investors to shift funds from emerging markets to developed markets.
The rupee hit a record low this week, while the rupiah touched its lowest in nearly three years.
On Thursday (16/08), Turkish Finance Minister Berat Albayrak assured international investors that the country would emerge stronger from its currency crisis, insisting its banks were healthy and signaling it could ride out a dispute with the United States.
Although Ankara appears to be committed to mitigating the current crisis, this does little to boost confidence in the lira as the US threat of more sanctions could be in for further contagious selloff, said ING's Sakpal.
"I am expecting continued volatility in flows ahead, with investors possibly avoiding high-risk countries like India, Indonesia and the Philippines," he said.