Asia's emerging-market bonds delivered double the returns of US, German and Japanese debt this year, drawing record inflows as budget deficits widened in developed nations.

Pictet Asset Management Ltd, part of Switzerland's largest privately held bank for the wealthy, said its Asian Local Currency Debt fund tripled in size to $1.2 billion in 2010 because interest rates and currency reserves are higher than in developed economies. Japan's Kokusai Asset Management Co doubled assets in its equivalent fund to $206 million.

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Pictet, Kokusai and Western Asset Management Co, which together oversee $639 billion, say nations that were bond-market pariahs during the currency crisis of 1997-1998 are now relatively safe because of mounting issuance in the US, Europe and Japan. Moody's Investors Service upgraded its debt rating for South Korea and raised its outlook for Indonesia in the second quarter, while cutting Greece below investment grade and warning the US may lose its top ranking.

"They used to be risky assets," said Wee-Ming Ting, head of Asian fixed income in Singapore at Pictet, which manages the equivalent of $101 billion globally. "Now investors see them as a safe haven. Economic growth in Asia is still doing well."

Bond funds focused on Asia excluding Japan have taken in a record $2.4 billion in 2010, compared with net withdrawals of $679 million in the same period of last year, according to EPFR Global, a US research firm that tracks investment flows.

Outperforming bunds

JPMorgan Chase & Co's index of Asian local-currency debt excluding Japan returned 12.8 percent in 2010. Global sovereign bonds returned 4 percent in that period, Bank of America Merrill Lynch indexes show. Bonds gained 6.1 percent in the US, 6.4 percent in Germany and 2.3 percent in Japan. An index tracking Greece, Ireland, Italy, Portugal and Spain fell 1.7 percent.

Asian bonds beat stocks by the most since JPMorgan started tracking the figures in 2003 as the MSCI Asia Pacific Index of shares excluding Japan fell 5.3 percent, including reinvested dividends.

Clients in Europe and America are showing increased interest in diversifying toward Asian bonds as regional shares underperform, said Rajeev De Mello, the head of Asian debt for Western Asset in Singapore.