Asian bond markets have been thrashed. A record bond outflow of funds occurred in September. This is the largest outflow of funds since March 2022. A total of 5.48 billion dollars of funds left Asian debt markets. The largest impact of this outflow of funds occurred in Indonesia. This trend of outflow of funds is not limited to Indonesia alone. It is there in Malaysia, India, and even South Korea. Something is spooking foreign investors.
Indonesia is at the forefront of a large bond market sell-off in the region
Indonesia suffered the biggest hit during September with a staggering net outflow of $4.6billion—the largest one-month outflow at least going back to 2016. This record outflow occurred against the backdrop of growing fiscal worries sparked by protests and the surprise resignation of finance minister Sri Mulyani Indrawati. Thus, it can be concluded that Indonesia is a risky market during September.
Malaysia did not fall far behind and recorded its largest amount of bond disposal in a month since October 2024. Foreigners offloaded a staggering amount of Malaysian bonds to the tune of USD 1.63 billion in September. The contagion effect spread like wildfire in the neighboring Southeast Asian markets. Nothing much came to the rescue for South Korea, India, and Thailand as they recorded small equity inflows amounting to $563 million, $124 million, and $60 million, respectively.
Political instability causes record outflows of investments
The surprise resignation of Indonesia’s finance minister, Sri Mulyani Indrawati, amid large-scale protests clouded the near-term economic trajectory of Indonesia. This political upheaval contributed to existing concerns among global bond market investors with regard to Indonesia’s debt sustainability.
The economic situation is worsening in world-class economies
Beneath the large outflows, there is a worrying trend of economic sluggishness in Asia’s leading economies. Industrial production fell sharply in September because of sluggish growth in the U.S. economy as well as continued weak demand in China. The deteriorating macroeconomic trend is a concern related to Asia’s growth prospects, with increasing global trade tensions and inadequate domestic demand in the Asian economies.
Key economic factors include:
- Expected consequences of the tariff policies of U.S. President Donald Trump
- A lackluster growth rate in the U.S. economy is slowing export demand
- A persisting lack of Chinese demand is impacting regional trade
- Domestic demand constraints are capping home growth drivers
“Moreover, a weaker growth trajectory in domestic demand is expected to pose continued restraint to growth in the majority of Asian economies,” wrote Khoon Goh, head of Asia research at ANZ.
Investor sentiment moves to risk-off positions worldwide
These September outflows reflect more than just nation-driven worries – they instead represent a larger change in global sentiment among investors concerning Asian emerging markets. Global investors are reconsidering their debt market risk exposure amid growing economic uncertainties. This risk-off sentiment can be attributed to increasing doubts among market participants concerning Asia’s prospects to handle current economic tests with sustainable bond market performance.
This could not have come at a worse time for Asian economies, which are looking to raise funds to finance their development projects as well as cope with their debt. This is especially because the rates of interest in the global market have been high, and economic growth is slowing. This means that the price of capital is increasing at a time when Asian economies can afford it the least.
It is no surprise that September’s enormous bond outflows came as a wake-up call to policymakers in Asia. It is particularly tough to continue with business as usual, given the instability in politics and economies in Asia, combined with changing global attitudes. Bond outflows could likely continue well past 2026 if Asia’s economies fail to strengthen their position.
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