US Election Nerves Are Fuelling Bets On Asian Sovereign Bonds

Investors are turning to Asian sovereign bonds to ride out the US election, giving a boost to markets that have already benefited from billions of dollars of foreign inflows this year. 

Asset managers such as Allianz Global Investors, Franklin Templeton and Gama Asset Management are bullish on government debt in Asia ex-China. Expectations of rate cuts have buoyed demand, and they say these bonds will be safe havens in the event of market jitters around the election.

“In the next few weeks, there’s going to be a lot of noise,” said Christy Tan, an investment strategist at Franklin Templeton, which had over $1.6 trillion of assets under management at the end of September. “If you look outside of the US into Asia, where are the safe havens? The easiest that comes to mind is Indonesian bonds,” she added, pointing to the country’s manageable inflation and the positive impact of its new president.

Traders across Asian markets are bracing themselves for volatility as Nov. 5 nears. Wall Street banks are telling their clients to expect a decline in China’s currency amid rising tariff risks, and equity investors are weighing up the impact of a possible trade war flare-up on chip stocks and other sectors.

South Korean policymakers cut rates this month for the first time in more than four years, and central banks in Indonesia and the Philippines have also lowered borrowing costs. The two Southeast Asian countries are now among the best picks for bond investors, said Rajeev De Mello, chief investment officer at Gama Asset Management. 

South Korea and India are also getting a boost from recent changes by index provider FTSE Russell, which added sovereign bonds from the countries to two separate indexes. India’s inclusion in the emerging market debt gauge from next year may boost inflows by $9 billion, according to Barclays Plc.

“Fundamentals are improving, technicals are positive and valuations are still attractive,” said Shamaila Khan, head of fixed income in emerging markets and Asia Pacific at UBS Asset Management, who recommends dollar bonds issued by Sri Lanka and Pakistan. “With the Fed cutting rates and the China stimulus, I think you have a tailwind to emerging market performance for 2025.”

Still, Asian sovereign bonds aren’t without risk. Further losses in Treasuries may squeeze the yield advantage investors get from holding Asian sovereign debt. And any strengthening in the dollar would dent the appeal of foreign-currency assets.

Indonesia’s 10-year bonds yield less than 260 basis points more than similar-maturity Treasuries, compared with a premium of almost 300 basis points on Sept. 10. The spread between Indian and US 10-year notes has also narrowed to less than 260 basis points from more than 320 basis points in early September. 

A handful of emerging market investors say local-currency government debt with intermediate tenors is the place to be as global fixed income markets reprice. 

“What we are doing is shortening duration—into the belly of the curve, about five years,” for countries like Thailand and India, said Leonard Kwan, a portfolio manager at T. Rowe Price Group Inc. The approach is to “consolidate risk, to be able to respond whichever outcome” materializes in the US election. 

The key questions for many Asian investors heading into the election include what the outcome may mean for global trade, particularly the chance of a flare-up in US-China tensions if Donald Trump is elected.

India, Indonesia and South Korea are all important trading partners of the US, increasing the chances they may weather rising trade tensions. Although Trump has called India an “amazing abuser” of tariffs, he has also complimented Prime Minister Narendra Modi and both major parties see the South Asian nation as an important counterweight against China.

“If whoever takes office starts to think of trade wars with China, for example, or trade wars against Mexico, that can actually benefit India because it’s a country that has no bilateral tensions with the US,” said Carlos Carranza, a fund manager at Allianz Global Investors in London.