The bear market for Asian currencies could extend to bonds, sparking a vicious cycle of currency weakness, leading to a bond sell-off, leading to more currency weakness, according to a September 22 HSBC research report.
HSBC believes that the global sell-off in Asian equities has already priced in but other asset classes, such as bonds, are now at risk in a wider risk-off environment.
“The concern is what happens if the market remains bearish and we see further liquidation of wider holdings, such as bonds,” said the report. “Given the resilience of the bond fund flows, if we were to see an intensification of global financial pressures, and greater liquidation of positions, the currencies with heavy foreign bond positioning would face greater strain.”
The British lender believes that bonds most at risk are those denominated in the Malaysian, Indonesian and Korean currencies. It also notes that there were roughly US$3 billion of outflows from foreign holdings of Indonesian bonds during the second week of September. Foreign ownership of Indonesian bonds remains relatively high - at 33.6% of the total - putting the market further at risk as foreign investors are more skittish.
HSBC argues that assets denominated in Asian currencies continue to be sensitive to a risk-off environment but positioning is also important. It believes that assets denominated in the Thai baht are less at risk because foreign ownership of Thai bonds is only 6.6%.