World-Beating Latin America Bonds Fail to Win Japan Skeptics

(Bloomberg) -- The rebound in Latin American bonds from the coronavirus sell-off has attracted investors from around the world. Japanese funds? Not so much.

Money managers from the world’s third-largest economy have been trimming holdings of debt from countries such as Brazil and Mexico amid the widening spread of the pandemic in the region and the rising tide of political tensions. Their cautious stance comes even as Latin American bonds have returned yen-based investors almost 7% this quarter, about twice the gain from their global EM peers as measured by Bloomberg Barclays indexes.

“Now is the time to choose safety over winning big in a rebound rally,” said Takeshi Yokouchi, senior fund manager in Tokyo at Sumitomo Mitsui DS Asset Management Co., which oversaw the equivalent of $138 billion at the end of March. “The low yields in Latin American assets are another reason that make them less attractive.”

Japanese mutual funds have been net sellers of Mexican and Brazilian bonds every month since at least February, according a Bloomberg analysis of data from Japan’s Investment Trusts Association. They’ve offloaded a net 4.27 billion pesos ($190 million) of Mexican bonds this year, and 1.09 billion reais ($205 million) of Brazilian debt, the data show.

READ: Mexico Downgrades Push Japan Fund to Get Creative With Peso Debt

The world-beating recovery in Latin American bonds from the virus sell-off illustrates one of the biggest points of contention in current financial markets. To some it signals the impact of the pandemic was overdone, while others question whether the rebound is justified given that much of the global economy is heading for the worst recession since World War II following economic lockdowns.

More Choosy

Some Japanese investors are taking a more nuanced approach to the region, saying factors such as global trade tensions will hurt certain countries more than others.

“I’m not expecting U.S.-China tensions to be resolved, so that would probably mean more downward pressure for Brazil” against Mexico, said Satoru Matsumoto, a money manager at Asset Management One Co. in Tokyo. Mexico will probably fare better in terms of yield levels, lower political risk and even to some extent, in its balance of payments, he said. “It isn’t going to be a regional bet.”

The difference between the outlook for the two countries is already apparent in the return Japanese investors would have made this quarter. Mexican debt has returned 12% on a yen basis, defying ratings downgrades by three major agencies during March and April, while Brazilian bonds have lost 0.2%.

The rebound in Latin America is also facing a growing threat from the fact the region is becoming the main global hotspot for Covid-19 cases.

Both Brazil and Mexico announced new daily records for infections last week, while Venezuelan leader Nicolas Maduro said he would “radicalize” lockdown measures in the capital. A resurgence of cases would deepen this year’s recession in the region’s three largest economies by more than a percentage point, the Organisation for Economic Co-operation and Development said last week.

The risk of a further economic slowdown will prompt Mexico’s central bank to lower its policy rate by 50 basis points this week to 5%, according to a Bloomberg survey of economists.

For Sumitomo Mitsui DS’s Yokouchi, these concerns mean he prefers to put his money into Asia, at least for the time being.

“I’m more positive on Asia,” Yokouchi said. “We’re seeing faster recovery from the pandemic and the synergy you see from China’s recovery is larger.”

©2020 Bloomberg L.P.