There is little to fault the fundamentals of Indonesian fixed income, with a strongly supportive mix of growth-inflation profile (DB expects inflation to stay within the CB target zone of 4-6% for at least another quarter), a benign policy stance from BI, attractive yield differentials (versus the US), healthy external surpluses and a favorable credit trajectory (notably FX reserves coverage), reduced political noise, and robust market technicals. The government has completed 72% of its gross local issuance requirements for the year, and with the realization on budget spending yet again lagging, is in a very comfortable cash position. The new restrictions on holding period for SBIs should cause some reallocation of funds into short dated bonds. At the other end of the curve, with 10Y yields looking a tad rich below our target of 8.25% (and at a spread of under 200bp over 1M SBI), we are looking for some bull flattening in the 10Y+ sector.

Increase INR bonds, reducing duration underweight
The recent INR weakness has been exaggerated by outward FDI related flows, which we think are now over. Improved carry, a hawkish CB, and a healthy privatization driven IPO pipeline should be supportive of INR appreciation, and the latter is unlikely to be resisted by RBI. The much larger than expected yield on the 3G (and broadband) auctions is potentially a game changer for technicals of the bond market, particularly also with the government's steps to partially liberalize fuel pricing likely mitigating the subsidy payouts for the year. Besides with inflation likely to peak in the next couple of months, and RBI keeping to its 'calibrated' stance on policy tightening, any easing of the current cash crunch into end of this month (with government spending part of its 3G kitty) should be supportive for the front end and belly of the curve.

Eoin Treacy's view Over the last few months, the general focus of investor anxiety has been on the threat of deflation posed by the USA and European economies, but other countries have different preoccupations. These range from those managing economies leading the world in terms of GDP growth, attempting to prevent overheating, balancing the needs of a growing consumer base with rising inflationary pressures, raising short-term interests so that the trajectory of development is sustained and expressing greater confidence by allowing currencies to appreciate, albeit gradually. Countries with these sorts of preoccupations are concentrated in Asia and Latin America and as a result tend to be the focus of our analytical attention because they have a large number of promising investment opportunities.

Indonesian government bond yields remain in a consistent downtrend and at 8.115% remain competitive with what is on offer in the West. A sustained move above 9.5% would be required to question the consistency of the decline and medium-term demand for these bonds.

Indian government bond yields have lost uptrend consistency, with a larger reaction, that has broken the progression of higher reaction lows. This action suggests that bond investors are beginning to discount the threat of inflation and a sustained move back above 8% would be required to question scope for some further compression of these yields.

Given the underperformance of the stock market and moves to combat rising house prices, Chinese government bond yields have been falling as one of the only assets available to mainlanders that are performing. A progression of lower rally highs has been evident since October and a sustained move above 3.5% would be required to question scope for further demand dominance.

Singapore's government bond yields broke downwards from the yearlong range last week and a push back up into the overhead range would now be required to question scope for further compression.

Malaysia's government bond yields also indicate a return to demand dominance and extended the 7-month downtrend this month by sustaining the break below 4%. A move back above the 200-day MA, currently in the region of 4.15% would be required to question scope for some further compression.

South Korea's government bond yields fell sharply in February and March and stabilised somewhat below 5%, however a sustained move above that area would be required to question scope for some further downside, particularly in the view of the commonality across the region.

Taiwanese government bond yields have been ranging, with a downward bias, mostly above 1.35% since late 2008. This area also marked the 2003 low. The rate has steadied somewhat near 1.4% over the last month but a sustained move above 1.5% and the 200-day MA would be required to indicate supply has regained the upper hand.

Thai government bond yields have been trending steadily lower since November but jumped two days ago, in response to the interest rate hike. While the progression of lower highs remains intact, the risk that the yields are close to a medium-term low has increased.

Pakistani government bond yields broke upwards from their 10-month range last week and a sustained move below 12.8% would be required to question scope for further upside.

Interestingly, the yields for US 10yr Treasuries are not so different from many of the yield illustrated above. The rate extended the three-month downtrend at the beginning of July by breaking down from the 1-year range and the progression of lower rally highs would need to be broken, with a sustained move above 3.15%, to indicate bond bears are regaining the upper hand. While the patterns of these sovereign debts are relatively similar the reasons behind this activity differ quite considerably. Asian debt is performing on the merits of stronger returns and the sound fiscal positions held by many of the respective countries. US Treasuries are benefitting from what intuitively seems to be a dubious safe have status, despite large deficits at government, state and municipal levels.

While not everyone can invest in some of the government bonds of Asian countries, these markets give us an added perspective on the attitudes of institutional investors towards the economic prospects for these countries and are worth keeping an eye on.