Bond investors in three of Asia’s biggest emerging markets are starting to push back against record increases in government borrowing, an ominous sign for policy makers trying to revive economic growth with fiscal stimulus.

In India, dwindling appetite for sovereign bonds drove yields to their biggest increase in more than two years last month while Indonesia’s latest bond auction drew the fewest bids since April. Rates in South Korea have surged to the highest level in five months.

As governments globally sell sovereign bonds faster than central banks can buy them, the warning signs from Mumbai to Seoul underscore the challenge to markets everywhere from ever-increasing debt. While developed markets like the US have largely lapped up the record supply so far, pushing yields to all-time lows, it’s a different story in other economies.

“Real cracks are starting to show,” said Andre de Silva, global head of emerging-market rates research at HSBC Holdings Plc in Hong Kong. “In most high-yielding emerging markets, there is a lack of domestic appetite for absorbing any large expansion in government borrowing.”

While policy makers across the region have deployed unprecedented amounts of stimulus, there is no assurance that all the spending will be enough to get their economies out of the woods. If the pandemic rages on too long, nations may end up with more debt than they’ve ever seen and a weakened capacity to pay it back.

“It is not clear that Asian emerging markets have done enough fiscal policy to get through this crisis without leaving long-lasting scars on their economies,” said Robert Gilhooly, senior emerging markets economist at Aberdeen Standard Investments in London.

The strain on central banks is becoming apparent. Underwriters in India had to step in to rescue bond sales three times in the last month. The Bank of Korea announced it will step in with monthly debt purchases, but these are projected to fall well short on new supply.

Bank Indonesia has gone further than its peers, buying bonds directly from the government — raising questions over its independence in the process. The country’s debt issuance this year is estimated to surge an eye-popping 124 per cent.

Bond yields in India may climb to 6.40 per cent by the end of December, from 6 per cent now, amid surging inflation and the spectre of even higher borrowings, according to ING Bank NV.

Worries about the flood of issuance are also creeping into developed markets.

While debt servicing costs in the US are now the lowest in half a century, Treasury’s record auction of new 20-year bonds last month drew a higher-than-expected yield, stirring some concern about growing supply.

Risk and reward

To be sure, rising yields in emerging Asian markets help attract investors willing to take on higher risks.

Foreign inflows into Indonesian debt climbed to the highest since June in the week through September 4, showing that some investors remain calm about the central bank’s foray into debt monetisation. Net outflows returned last week.

Amundi Singapore Ltd says Asian emerging-market bonds will remain appealing because of their relatively high yields and as the region leads a global economic recovery.

“Stability in emerging Asia FX will also continue to bolster investors’ confidence,” said Joevin Teo, Amundi’s head of Asian fixed income. “Real rates are also generally attractive.”

Exit strategy

Others like Jean-Charles Sambor, head of emerging markets fixed income at BNP Paribas Asset Management in London, see more nuance.

Sambor is negative on duration in South Korea, where he is mindful of the risk of foreign outflows. In Indonesia, fundamentals remain strong and the market is overestimating risk of policy mistakes, he said.

He also warned that while many investors worry about the flood of bonds, old foes like inflation could re-emerge as a problem in some markets.

“I think the supply risk is mostly priced in,” Sambor said. “The risk, however, is what the exit strategy will be down the road.”

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