By Patturaja Murugaboopathy and Gaurav Dogra
(Reuters) - Asian bond markets witnessed a second consecutive month of outflows in May and will likely come under more pressure as major central banks tighten their monetary policies this year.
Data from central banks and bond market associations showed foreign investors sold a total of $3.8 billion in India, Indonesia, Thailand, South Korea and Malaysian bonds in the last month.
"The recent monetary policy decisions by major central banks such as the ECB announcing to end its bond buying programme soon, and the more hawkish view by the U.S. Fed may result in foreign funds leaving emerging markets in search for better yields elsewhere," analysts said in a Maybank report.
Malaysian bond markets led regional outflows in May as investors turned more cautious following a shock election result which brought about a change in government for the first time since the country's independence. Foreigners sold $3.24 billion of Malaysian bonds last month, the biggest since March 2017.
Indian bonds faced foreign outflows of $2.9 billion, while Indonesian bonds saw outflows of $830 million.
India and Indonesia have the biggest current account deficits in the region and are thus vulnerable if they have to attract foreign money to foot bigger oil bills.
In efforts to curb capital outflows, the Indonesian central bank hiked interest rates twice last month, while India also increased its rates in early June.
For a graphic on foreign flows into Asian bonds, click https://reut.rs/2JY2UoE
For a graphic on Asia bond yield premium over US, click https://reut.rs/2MONYXN
For a graphic on Asia current account balance, click https://reut.rs/2K5OQFP
However, the impact of central bank moves on their currencies and bond prices have so far been muted.
"The rupee and rupiah have been underperforming despite their central bank moves to tighten their policies due to their large current account deficits," said Prakash Sakpal, economist at ING.
South Korean bond markets bucked the regional outflow trend in May with foreign inflows of $3 billion, helped by easing tensions on the Korean peninsula.
Analysts said escalating trade tensions between the United States and China will also affect capital flows into the region apart from major central banks' monetary tightening this year.
"It is too early to expect any recovery in regional currencies when we have the external environment getting worse and worse," said ING's Sakpal.
"Flow data suggests that investors have a defensive stance on EM assets, particularly as weak EM FX continues to put pressure on local currency debt," said Lawrence Lai, Asia rates and flow strategist from Standard Chartered (LON:STAN) in a report.
"We shift our price signals for EM bonds and FX to negative from neutral."