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By Gaurav Dogra

(Reuters) – Emerging Asian bonds excluding China continued to see foreign inflows for a 21st straight month in February, but analysts are turning pessimistic about the outlook due to concerns over higher U.S. interest rates, soaring inflation and growing global fallout from the war in Ukraine.

Overseas investors purchased a combined net total of $6.01 billion in South Korean, Thai, Indian, Indonesian, and Malaysian bonds last month, compared with net buying of $6.37 billion in January, data from regulatory authorities and bond market associations showed.

Monthly foreign investment flows: Asian bonds https://fingfx.thomsonreuters.com/gfx/mkt/akvezxwlepr/Monthly%20foreign%20investment%20flows%20Asian%20bonds.jpg

South Korean bonds received foreign purchases of $3.29 billion last month, while Thai bonds drew $1.73 billion, their fifth consecutive monthly inflows.

Malaysian and Indonesian bonds also received foreign capital worth $750 million and $651 million, respectively.

On the other hand, Indian bonds suffered outflows of $421 million after an inflow of $698 million in the previous month.

“Considering that the Russia-Ukraine conflict occurred in the second half of February, whole-month bond flow figures may not reflect the full impact on foreign demand for Asia bonds,” said Duncan Tan, a strategist at DBS Bank.

“In the near term, with geopolitical risks and Fed lift-off expected to weigh on Asia bonds, foreign bond inflows are likely to be weak.”

The U.S. 10-year Treasury yield rose to the highest levels in two-and-a-half years ahead of an expected Federal Reserve decision later on Wednesday to raise U.S. interest rates for the first time in three years.

Despite uncertainties over the broader impact of the Ukraine crisis, analysts expect the Fed be aggressive this year to stem surging prices, with annual inflation in February rising at the fastest pace in 40 years.

“Geopolitical tensions, tighter U.S. liquidity and high energy prices will all weigh on portfolio flows into Asia,” Khoon Goh, head of Asia research at ANZ, adding that he expects outflows from emerging Asian equities and bonds in the near term.

Foreign investors’ holdings in Asian bonds https://fingfx.thomsonreuters.com/gfx/mkt/byvrjewaxve/Foreign%20investors’%20holdings%20in%20Asian%20bonds.jpg

(Reporting by Gaurav Dogra and Patturaja Murugaboopathy in Bengaluru; Editing by Kim Coghill)