EM local bonds gain favour as dollar debt lags
Current trends indicate that investors are leaning towards local emerging market debt rather than dollar-denominated bonds. The allure of attractive valuations combined with ongoing carry trades fuels this shift in strategy. Fund inflows and performance metrics distinctly reflect this investor inclination. Nonetheless, potential rate hikes by the Federal Reserve could pose challenges to this…
Emerging-market investors are currently favoring local-currency sovereign debt over dollar-denominated bonds from developing nations due to rising Treasury yields making dollar bonds less attractive. This strategy is driven by attractive valuations and the opportunity for profitable carry trades, where investors borrow low-yielding currencies to invest in higher-yielding assets.
This shift in preference is evident in fund flows, positioning, and relative performance. A Bloomberg gauge tracking domestic emerging-market debt has outperformed an index of dollar-denominated bonds by over 3 percentage points since the end of June, marking the largest quarterly outperformance since 2022. Fund managers are also increasingly favoring this divergence, with 84% of 38 global fixed-income fund managers overseeing $444 billion in combined assets now overweight in local EM debt compared to just 38% in August, according to a Bank of America survey conducted between September 4 and 9.
However, this trade may face challenges as the Federal Reserve has raised interest rates and signaled potential further increases. A stronger dollar could deter investors from emerging-market assets like local-currency debt.
Written by urgent.news from The Economic Times - Top News's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
