Haven Rout Sends Wall of Money Rushing Into Emerging Markets

(Bloomberg) -- Sentiment in the bond market has shifted toward taking on more risk, with a wall of money that had been waiting on the sidelines making its way to emerging markets, according to Pinebridge Investments.

Thursday’s rout in U.S. Treasuries and German bunds coincided with a rally in high-yielding debt of emerging markets, Anders Faergemann, a senior portfolio manager at Pinebridge in London, said by phone. The move helped junk bonds to recoup some of their underperformance in August relative to investment-grade debt, he said.

Biggest Bond Rout in Years Whiplashes Bulls Who Had Been Right

“We are seeing a rerun of the hunt for yield we saw in June-July after the May wobble,” Faergemann said. “We had a correction in August and valuations have become attractive. Investors sitting on cash are coming back after the holiday period.”

Renewed expectations for progress in the U.S.-China trade talks and a better-than-expected print on U.S. service-industries growth spurred bond investors to shift some of their capital to riskier bets. That contrasts with their rush to safety in August when the average yield on emerging-market dollar bonds jumped the most in nine months.

Thursday’s gains for riskier assets may continue as a drop in new-bond issuance last month left investors flush with cash, Faergemann said. Money managers who have to meet a yield target would have to put that money into operation in developing nations, he said, citing the proliferation of negative-yielding debt around the world.

Yield-Chasers’ Holiday Sends Emerging-Bond Sales to 42-Month Low

• The yield on Argentina’s 100-year bond fell for a third day to below 17%, after closing last week at 18.85%
• Longer-dated bonds enjoying a resurgence included Nigeria’s 2047 debt, which shaved off 15 basis points of yield
• Angola’s international bond due 2028 shed 13 basis points of yield, building on a 23 point drop on Wednesday
• Ghana’s sinkable securities due 2051 advanced, taking the two-day drop in yield to 33 basis points

The gains could extend if the U.S. economy continues to grow by at least 2% and China’s expansion doesn’t fall below 6% even as global central banks remain accommodative, Faergemann said.

“It’s this sort of a sweet spot we are looking for,” he said.

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