A visitor views the electronic board displaying stock activity at the Brasil Bolsa Bacao (B3) stock exchange in Sao Paulo, Brazil. (Photographer: Patricia Monteiro/Bloomberg)

Emerging-Market Bonds Are Picking Up Steam

(Bloomberg) -- The pieces are falling into place for a rally in emerging-market debt.

After trailing behind equities this year, bonds are gaining momentum. The Bloomberg Barclays emerging-market local-currency bond index is approaching the record high it reached almost a year ago. And while equity funds suffered their biggest weekly outflow since the second quarter of last year -- with a U.S.-China trade resolution probably still weeks away -- fixed-income funds are attracting “solid amounts of fresh money,” according to the most recent EPFR Global data.

The brightening bond-market outlook shows how the weakest economic growth since the global financial crisis is boosting the case for the Federal Reserve’s dovish turn, limiting the dollar’s gains and allowing other central banks around the world to follow suit. The U.S. currency had its biggest weekly drop this year ahead of the Fed’s decision Wednesday, when policy makers may keep rates steady while signaling one more increase or none at all through the rest of 2019. Central banks in Indonesia, the Philippines, Thailand, Brazil, Colombia, Taiwan and Russia will also probably hold rates steady this week.

The local-currency bond market isn’t “that crowded,” with the prospect of rate cuts in Asia and other countries including Turkey and Mexico in the coming months, said Edwin Gutierrez, the London-based head of emerging-market sovereign debt at Aberdeen Standard Investments.

“We do foresee rate cuts in the second half to be supportive for the asset class,” he said, adding that Mexico is the biggest position in his fund.

Read more: Federal Reserve and Friends to Sound Dovish

Emerging-Market Bonds Are Picking Up Steam

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Will Doves Cry?

  • The Bangko Sentral ng Pilipinas meeting will for the first time be presided over by new Governor Benjamin Diokno. Investors will gauge how serious Diokno is about pursuing a pro-growth stance and tolerating a weaker peso. BSP raised rates last year by a total of 175 basis points to help support the peso. The currency has weakened since Diokno’s appointment on March 4
  • Bank Indonesia has room to cut its policy rate as inflation has eased to a near-decade low and the rupiah is recovering. Central bank Governor Perry Warjiyo reiterated earlier this month the benchmark rate is near its peak following 175 basis points of tightening in 2018. A deteriorating trade deficit, however, may deter the bank from easing any time soon as it focused on “external stability” at last month’s meeting
  • “We’ll be looking for clues if Asia’s aggressive duo in 2018, Indonesia and the Philippines, continue to defy easing over currency stability,” Prakash Sakpal, an economist at ING Groep NV in Singapore, wrote in a note
  • The chances of Bank of Thailand raising its benchmark interest rate in March are slim as inflation remains benign, Kanit Sangsubhan, a member of the monetary policy committee, said this month. The central bank last boosted its rate in December, the first hike in seven years
    • Thailand on March 24 holds its first general election since the military junta seized control in a 2014 coup. Foreign investors have already pulled a net $700 million from Thai stock and bond markets this year amid the political intrigue; at the same time, the currency’s rise has weighed on tourism and exports, the key drivers of the economy
  • Read more: Low Inflation in Southeast Asia Puts Analysts on Rate-Cut Watch
  • Brazil’s central bank on Wednesday will probably hold its key rate at an all-time low in its first policy meeting under new chief Roberto Campos Neto. Investors will watch for any hint of further rate cuts after a spate of disappointing economic data; policy makers in Colombia, Taiwan and Russia will also likely keep rates unchanged. Morocco will decide on rates too this week

Bolsonaro to Meet Trump

  • Brazilian President Jair Bolsonaro, making his first visit to the U.S. since taking office, is set to meet Donald Trump on Tuesday at the White House, where they may sign bilateral and tax agreements. He then heads to Chile to meet President Sebastian Pinera on Thursday
  • Brazil’s energy minister says an accord to be signed with Trump may pave the way for U.S. companies to explore Brazil for uranium and invest in new nuclear power plants

Macri Blow

  • Argentine gross domestic product and unemployment data on Thursday are expected to show the economy sank further into a recession, another blow to President Mauricio Macri as the country heads toward elections
  • The dollar-peso’s one-month non-deliverable forward implied yield -- a gauge of traders’ expectations on the currency’s funding costs -- more than doubled last week to 80.9 percent, the highest in the developing world

IMF on Ecuador

  • The International Monetary Fund will probably release new details on the economic overhaul needed in Ecuador as part of a $4.2 billion financing program; Ecuador has provided the second-best bond returns in the developing world this year

Key Economic Data

  • Poland will see a slew of macro data, including core inflation and labor and output prints. The central bank will publish minutes from its last meeting on Thursday
  • South Africa publishes consumer inflation data for February, with the median estimate in a Bloomberg survey predicting a slight acceleration. January retail sales data will also be watched by traders looking for clues on the central bank’s policy path, with the next review scheduled for March 28

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