Specter of Worse Emerging-Market Rout Drives Loomis Fund to Sell

A Loomis, Sayles & Co. fund has sold the bulk of its emerging-market bonds, warning that a strengthening dollar and rising Treasury yields make the securities increasingly risky to hold.

Boston-based portfolio manager Andrea DiCenso sold local-currency government debt from South Africa to Mexico in the past week when inflation jitters catapulted U.S. yields to their highest level in a year. The positioning reflects a growing caution among investors about the risk of another bond selloff on the scale of the 2013 taper tantrum.

“That rise in real rates story tends to be the killer for emerging-market assets’ performance,” said DiCenso. “We are growing concerned around the resiliency of the local market trade into the coming weeks and months.”

Specter of Worse Emerging-Market Rout Drives Loomis Fund to Sell

Developing-nation bonds have fallen after rallying to a peak in January as the prospect of tighter monetary policy and less central bank support deter investors. Still, some funds such as Franklin Templeton say another rout may be a chance to buy as the turmoil would likely be just a temporary setback.

Compared to 2013, the risks today are “more concerning for emerging-markets” because leverage has increased, DiCenso said.

The 2013 taper tantrum roiled emerging markets when the Federal Reserve’s announcement that it would roll back its quantitative easing led to a spike in bond yields. Turkey, Brazil, South Africa, India and Indonesia were among those that suffered steep losses.

Specter of Worse Emerging-Market Rout Drives Loomis Fund to Sell

Healthy Correction

But not everyone agrees. Finisterre Capital says higher inflation expectations are temporary and expects benchmark U.S. Treasury yields to stabilize after rising to 1.7%-1.75%.

“It’s just a hiccup on the way,” said Damien Buchet, London-based chief investment officer at Finisterre, a unit of Principal Global Investors. Corrections are “quite healthy for our markets.”

The firm remains positive on emerging-market debt and has protected its portfolio by reducing exposure to high-beta EM currencies and shortening the maturity of bonds to lessen the sensitivity to U.S. yields.

Extreme Volatility

Loomis’ Emerging Markets Debt Blended Total Return fund, which oversees $296.6 million, has also sold local-currency notes from Russia and Indonesia. But it has retained its holdings of Egyptian debt and some Brazilian positions while still favoring emerging credit and hard-currency sovereign bonds.

Indonesia’s 10-year bond yields rose to a five-month high of 6.86% this week while that on equivalent Russian notes climbed as high as 6.80% in February.

“We have dramatically pulled back on our exposure because of those changing market dynamics from cross-asset volatility increasing,” DiCenso said. The firm will reassess its position once the volatility begins “to pull back from the extremely elevated levels we see them at right now,” she added.

Here are some other views from DiCenso:

‘At the moment we’re raising some cash. We’ll be looking at the reaction to the U.S. yield curve. Are we going to see repricing be pulled forward?

“We have some opportunities for data in the coming weeks. We have the opportunity to hear Powell speak -- I don’t believe he’ll have any reason to say anything different than he already has, which is essentially the market has been orderly, let the reflation come back to play, and they’re not really changing the policy at all.”

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