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To Stress Test Emerging-Market Bonds, Look at Foreign Holdings

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(Bloomberg) -- Local emerging-market bonds have had a rough month, roiled by concerns that rising U.S. interest rates mean investors will pull money out of riskier markets to park more cash in the developed world. Those with the highest foreign ownership could be most exposed.

Goldman Sachs Group Inc. analysts Mark Ozerov and Kamakshya Trivedi ran the numbers. The following markets were found to have high foreign holding ratios both relative to their peers across developing nations and to their own history.

  • South Africa
  • Indonesia
  • Russia
  • Colombia ("to a lesser extent")

Domestic investors are seen more stable, perhaps having fewer investing options to consider, and having greater long-run confidence in their own markets. Local-currency emerging debt markets that have seen less of an overseas presence, "suggesting potential ‘catch-up’ space" to the Goldman duo, include:

  • Brazil
  • Mexico
  • Malaysia
  • Poland

Average external ownership of local emerging debt, at 22 percent, is little more than half the 40 percent for the developed world, and in the longer run, Goldman anticipates that gap will shrink. Market access is improving in many countries -- China’s reforms are perhaps most notable -- and inflation rates have been coming down, increasingly anchoring price expectations. Goldman also cites a continuing trend of fixed-income diversification and reduced “home bias.”

But for now, "foreign ownership does appear to be part of the story behind the current bout of pressure" on emerging debt, Ozerov and Trivedi wrote in a note to clients Wednesday. “On the margin, higher foreign ownership does imply more sensitivity to a further sell-off in core rates markets."

©2018 Bloomberg L.P.

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