Foreigners net sold Asian bonds for the first time in three months in September as rising U.S. yields and a stronger dollar undermined the allure of regional assets.
Data from central banks and bond market associations showed overseas investors sold a net $2.47 billion in Indian, Indonesian, Malaysian, Thai and South Korean bonds in the last month - the most since May.
Sharp outflows in September suggests economies such as India and Indonesia, which are already pressured by higher oil prices and weakening currencies, would struggle to plug their external deficits.
South Korean bond markets witnessed foreign outflows of $1.7 billion last month, followed by India where investors sold $1.4 billion worth of bonds.
Malaysian and Indonesian bonds also saw outflows of $719 million and $291 million, respectively.
On the other hand, overseas investors purchased $1.68 billion worth of Thai bonds last week. Thai assets are relatively safer due to the country's robust growth and a large current account surplus to weather higher U.S. interest rates, according to Khoon Goh, Head of Asia Research at ANZ.
Regional assets are expected to feel more pressure from higher U.S. rates in coming months, as the U.S. Federal Reserve is anticipated to hike rates for the fourth time this year in December.
The 10-year U.S. Treasury yields rose on Thursday after the minutes of Fed's meeting last month showed all policy makers agreed to raise key interest rates for a third time in 2018 with many open to further rate hikes.
"While trade tensions and rising U.S. yields have been a catalyst for outflows, the region's slowing growth prospects are not helping either," said Khoon Goh of ANZ.
Further Fed rate hikes, no signs of easing U.S.-China trade tensions and higher oil prices point to portfolio flows remaining volatile, heading into the end of the year, he said.