Global Capital Flows to Southeast Asian Bonds: Betting on Central Bank Rate Cuts, Becoming a New Safe Haven Alternative to U.S. Treasuries

According to the Zhitong Finance APP, although the yields on Southeast Asian sovereign bonds are hovering at historically low levels, global funds are accelerating their inflow into the region, betting that major central banks will further ease monetary policy. Data shows that the average yield premium of ten-year government bonds in Southeast Asian countries compared to U.S. Treasuries has narrowed to its lowest level since 2011. This change stems from investors' increasing risk aversion towards U.S. assets—driven by the uncertainty of Trump administration policies, the "sell-off of dollar assets" trade continues to heat up, prompting funds to seek alternative targets.

The weakening trend of the dollar further boosts the Southeast Asian bond market. As local currency exchange rates stabilize and rebound, central banks in countries like Malaysia and Thailand gain more policy space to implement interest rate cuts to stimulate the economy without triggering capital outflows. Eugene Leow, a fixed income strategist at DBS Bank, analyzed: "Southeast Asian bonds will continue to benefit from the global fund reallocation, as the region's economic growth and inflation situation still require additional policy support from central banks."

Currently, the proportion of foreign capital holding Southeast Asian bonds remains significantly lower than pre-pandemic levels, indicating substantial room for incremental capital increases. Fund flows this quarter confirm this judgment: Malaysian government bonds attracted nearly $5 billion in foreign capital inflows, with the market widely expecting the country's central bank (the last central bank in Southeast Asia to maintain a tightening policy) to start cutting interest rates in July; Thai and Indonesian bonds attracted $1.4 billion and $2.4 billion in funds, respectively, likely to create the largest single-quarter inflow in three quarters.

It is noteworthy that some institutions view Singapore dollar bonds as a safe alternative to U.S. Treasuries. Amid concerns over the scale of U.S. debt and fiscal deficits, Singapore's AAA sovereign rating highlights its relative advantages. Homin Lee, a senior macro strategist at Longo Bank, bluntly stated: "If Moody's downgrades the U.S. rating, the attractiveness of Singapore bonds to cautious investors will continue to increase."

From the yield curve perspective, the yield on Singapore's ten-year government bonds is about 2.30%, close to the low since March 2022; the yields on ten-year government bonds in Thailand and Malaysia are also hovering near the lows since September and December 2021. HSBC's Asia-Pacific interest rate strategy head, Chen Pinru, predicts that by the end of the year, the yield on Singapore's ten-year government bonds may decline to 2.20%, while Thailand's yield may further drop from 1.68% to 1.60%.

The deeper logic behind this capital migration is that as global investors begin to reassess the risks of dollar assets, the Southeast Asian market, with its policy easing space and valuation advantages, is quietly becoming the "new safe haven" in the capital market