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The global bond market has experienced extraordinary volatility amid heightening trade tensions. Referencing weekly EPFR fund flow data, US bonds, which received the largest inflow (USD460bn) in the past 12 months, have underperformed. Mirroring the sharp rebound in UST yields and credit spreads, US bond funds registered USD28bn outflow in the past three weeks. Investors have been reallocating to assets like gold and other bond markets amid the confidence erosion in US dollar assets. Outflows from DM Europe, DM Asia (mainly Japan, Singapore, and Hong Kong), and EM Asia (mainly China and Korea) were relatively moderate, and inflows have returned since the week of April 17-23. Against this backdrop, the 10Y German Bund yield has fallen from a recent peak of 2.90% in early March to 2.50% of late despite expectations of additional fiscal boost. Likewise, the 10Y JGB yield fell to 1.31% despite the Bank of Japan's rate hike cycle. Meanwhile, the 10Y CGB and KTB yields retreated as rate cut expectations increased in view of the trade war.
Looking ahead, we see opportunities in the non-US fixed income market, particularly EM Asia. First, higher US tariffs and the likely accompanying global slowdown are weighing on the growth prospects of export-oriented Asian economies. Overcapacity worries amidst curtailed US demand should keep inflation in check. Second, the weaker US dollar also opens the window for Asian central banks to cut rates. Note that most Asian currencies have appreciated against the US dollar by 2-3%, except for the CNY and IDR. Third, there will also be diversification towards Asian bonds, from US bonds. Taken together, the spread between EM Asia and UST have room to compress further, rendering Asian fixed income attractive from a total return perspective in local currency terms (especially if the USD stays weak).
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