Emerging Bond Crackup Is Buying Opportunity for Bulls
(Bloomberg) -- The two-month rout in local-currency bonds from developing nations has some money managers smelling opportunity.
Investors at Lazard Asset Management LLC and Aberdeen Asset Management Plc say that the recent crackup in global credit markets provides an attractive backdrop for buying domestic notes. They see emerging-market currencies as a good bet as global central banks gradually pull back on stimulus, making the higher interest rates on local notes versus their dollar counterparts all the more appealing.
“It’s under appreciated what a low base we are coming off of in emerging markets,” said Arif Joshi, a New-York based emerging-market debt money manager at Lazard. “Local debt tends to have a lower correlation to U.S. Treasury yields and do expect them to do more favorably in a rising interest rate environment."
Joshi likes Brazilian local bonds as the government pushes austere measures aimed at improving the country’s fiscal outlook. Brazil’s 10-year local notes yield 10.4 percent, more than twice the 4.8 percent rate offered by benchmark dollar bonds due in 2028.
Bond buyers turn to local notes when they see opportunities for currency appreciation and higher interest rates than are available in the developed world, tolerating increased risk for steeper returns. As emerging-market currencies head toward their best year since 2009, local bonds returned over 10 percent this year, two percentage points more than overseas notes, according to data compiled by Bloomberg and Barclays.
BlackRock Inc., the world’s largest asset manager, says high-yield debt is the best bet in the fixed-income universe next year because it’s well positioned to withstand a gradual normalization in monetary policy from central banks in developed economies. The firm sees the dollar remaining stable versus emerging-market currencies.
“Benchmark-driven investors should favor emerging-market local markets,” according to a report last week by Sergio Trigo Paz and Pablo Goldberg, who run the emerging market fixed-income team.
Prices have gotten more attractive in the past two months. The Bloomberg Barclays Emerging Market Local Government Index has dropped 3.8 percent since reaching a three-year high Sept. 8 as concerns mount over the chances for a U.S. tax overhaul, the possibility of Nafta talks collapsing and political tension in South Africa and Turkey.
“No idea when the slide ends,” said Edwin Gutierrez, the head of emerging market sovereign debt at Aberdeen Asset Management Plc. “But I do view this as a buying opportunity.”
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