Pimco Sees Emerging-Market Uridashi Waning as Japan Craving Dims

(Bloomberg) -- Japan is losing its taste for emerging markets.

Sales of bonds denominated in developing-nation currencies to mom-and-pop investors in Japan fell to a 12-year low in 2018, according to data compiled by Bloomberg. Emerging markets made up just 8 percent of sales for Uridashi bonds, notes sold to Japanese household investors, half the average of the past decade.

Pimco Sees Emerging-Market Uridashi Waning as Japan Craving Dims

The shift by Japanese retail investors -- the main buyers of Uridashi -- coincided with the worst emerging-market currency selloff since 2015, which pushed investors toward the relative safety of notes denominated in yen and the U.S. dollar. That trend will probably continue in 2019 as long as trade tensions remain heated and the U.S. continues to post solid economic growth, according to Lupin Rahman, the global head of emerging-market sovereign credit at Pacific Investment Management Co., one of the world’s largest bond investors.

“For EM, you’ll continue to see net negative issuance unless something dramatically changes in the global backdrop,” she said from London. “To have a rebound, you’d need more weak data or noise from the U.S.”

Uridashi sales tied to currencies from Brazil, Mexico and South Africa -- historically the most popular emerging-market locales -- have declined in recent years. For the second year in a row, the Turkish lira ranked as the most popular issuing currency from a developing nation.

Pimco Sees Emerging-Market Uridashi Waning as Japan Craving Dims

Turkey’s higher yields helped compensate for geopolitical risks, while investors were more cautious toward Latin America ahead of presidential votes, Rahman said. Much of last year’s lira sales occurred after President Recep Tayyip Erdogan called early elections in April and before August, when the U.S. placed sanctions on the country amid a diplomatic tussle.

In 2019, the lira could decline in popularity if the nation’s central bank starts loosening monetary policy, and Mexico’s peso may see a rebound if President Andres Manuel Lopez Obrador disproves investor concerns, according to Rahman.

“We have to see which way AMLO heads,” she said. “If he’s less radical, you may see a bounce.”

©2019 Bloomberg L.P.