HSBC-Global bond flows compass-Mixed signals-100624130

Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it. Issuer of report: The Hongkong and Shanghai Banking Corporation Limited View HSBC Global Research at: https://www.research.hsbc.com  Weekly bond buying by non-residents rose in Korea and Mexico; EM debt funds recorded outflows for a second week  Foreigners pared their holdings in China government bonds in January  Non-resident investors bought New Zealand government debt in January; foreign demand for US Treasuries rose in December 2022 Chart of the week: Largest ever foreign outflows recorded in China government bonds in January 2023 Source: CEIC, HSBC Figure 1. Monthly trends in offshore bond flows of EM sovereign debt Source: Central bank websites, HSBC. *For period, check Table 1. -15-10-5051015Jan-22Apr-22Jul-22Oct-22Jan-23Foreign flows (USDbn)China Government bondsPolicy bank bondsHimanshu Malik, CFA Senior Global Emerging Markets Rates Strategist The Hongkong and Shanghai Banking Corporation Limited himanshu1malik@hsbc.com.hk +852 3941 7006 Soumya Mohanty Associate Bangalore 24 February 2023 Global bond flows compass Fixed Income Rates Mixed signals Global Fixed Income ● Rates 24 February 2023 2 Emerging markets (EM): High frequency non-resident holdings data suggests some signs of a return in offshore demand for EM local debt following a period of foreign outflows and sharp repricing in EM rates during February. Foreigners have started to add to local debt holdings in markets such as Korea and Mexico. However, foreigners remained cautious in a few markets such as South Africa ahead of the 2023 budget (South Africa Budget 2023 : Smaller shortfall, Eskom debt relief, more borrowing, 22 February 2023). Moreover, EM debt funds also recorded redemptions worth USD1.4bn over the past week, marking the second consecutive week of outflows but we note that EM debt funds flows tend to lag the return performance of EM debt. In Asia, non-resident investors bought Korea government debt (USD1.2bn) with inflows of USD680m and USD498m into Korea Treasury Bonds (KTB) and Monetary Stabilisation bonds (MSB), respectively. This marked the second consecutive week of inflows into Korea bonds. Similarly, two consecutive weeks of foreign inflows were recorded in Mexico government debt amounting to USD1.5bn, thereby rebuilding their exposure after paring positons in January. Hungary government debt saw inflows of USD184m over the past week after investors pared debt holdings for two consecutive weeks. Conversely, foreigners sold government bonds for two consecutive weeks in Indonesia but the pace of weekly selling moderated last week with outflows of USD288m. Indonesia, remains the highest recipient of foreign flows in Asia. Modest outflows were seen in Thailand (USD85m) and India (USD10m) local debt over the past week. Foreign appetite for China governmen