Rising dollar pummels emerging market bonds, cooling off a hot sector
Higher Treasury yields discourage riskier bets in developing nations
The dollar’s rise is squeezing bond markets in developing countries like Argentina, Indonesia and Turkey, gutting what had been a popular trade for investors seeking stronger returns.
Countries in the developing world have been borrowing heavily, supported by upbeat expectations for global growth and a long period of low to negative interest rates that drove investors into emerging markets to get any sort of yield. Emerging markets added on $7.7 trillion in new debt last year, including bonds and other types of loans, with about $800 billion of that denominated in foreign currencies, according to data from the Institute of International Finance.
But as U.S. rates have started to climb, with the 10-year Treasury note touching above 3% for the first time since 2014, and the dollar rallied, more cautious investors have pulled away from riskier emergingmarkets bets.
Investors have pulled about $4 billion from emerging-market bond funds over the past three weeks, according to data from EPFR Global, after investors last year poured about $70 billion into those funds.
A stronger dollar hurts developing countries by making it more expensive for them to service dollardenominated debts and to pay for imports. Those problems are especially acute for nations like Argentina that import more than they export and depend on money from foreigners to help them cover that deficit.
Argentina’s peso has plunged 12% over the past month, even after the country’s central bank raised interest rates to 40% in an attempt to stem the currency’s slide. The government is now seeking a credit met with a rush of buyers looking to line from the International add these assets at a cheaper price. Monetary Fund as it works to shore In May 2017, reports that Brazil’s up the economy. president was part of a wide-ranging
Global investors are keeping a corruption scandal sent its currency close eye on these markets, reeling 7% on one which had been among the trading day while stocks lost world’s top performers for more than 10%. But a buythe-dip stocks and bonds last year. SPECIAL mentality attracted That performance helped interest, and the markets push up emerging-market quickly recovered. currencies, too, with MSCI’s currency “Emerging markets had a good index climbing 11%. year from an economic standpoint,
The dollar’s steady slide last year and people thought a lot of optimism benefited many emerging-market on that front was warranted,” economies. While the dollar rally said Oliver Jones, a markets economist has lasted only a few weeks and at Capital Economics. “The could still fizzle out, a continued memories of previous crises fade, climb could mean more trouble for and people get complacent about those countries. the potential currency risk.”
Any sudden declines in emerging That markets kind last of rapid year snapback were usually that benefited Brazil last year has been missing during the recent rout, which showed these markets can still turn quickly. Turkey’s currency has fallen about 4.1% to an all-time low in the past month, while Indonesia’s rupiah has lost 1.4%.
Governments trying to raise money in the bond market have also struggled to get deals done. In Ghana, for example, officials delayed a bond offering scheduled for Wednesday, which was designed to pay off some of their outstanding, more expensive debt, according to bankers and investors familiar with the deal. The West African country ended up selling $2 billion one day later when market conditions improved, but at higher costs than officials expected when they announced the issuance.
In March, Bahrain scrapped an international bond sale after investors demanded too high a price, money managers said, even as the Persian Gulf nation became increasingly hopeful that a rebound in oil prices would help ease concerns about mounting debt levels.
Several companies in Latin America have also scrapped bond issuances after Argentina’s IMF announcement, like Telecom Argentina SA and Paraguay’s Banco Regional, which were scheduled to issue debt last week but ended up changing their plans due to market volatility, bankers said.
Few investors are calling a fullblown crisis in emerging markets, and many note that a number of emerging-market countries have taken steps to rein in spending and debt levels in recent years. Still, many believe the pressure is set to continue as investors pull back from riskier assets such as emerging-market debt to invest in higher-yielding U.S. Treasurys.
The Federal Reserve remains on track to raise rates at least two more times this year, but investors see a 47% chance that the U.S. central bank delivers at least three more rate increases, according to CME Group. That should help drive the yield on the 10-year Treasury to 3.24%, according to a recent Wall Street Journal survey of economists.
“The interest-rates advantage has narrowed quite substantially,” said Brad Bechtel, global head of foreign exchange at Jefferies Group. “It’s hard to invest in those areas when you’re not being compensated for it.”
The debt that emerging markets have issued in dollars— which was cheaper for them when U.S. rates were low—is likely to face the most pressure, analysts say. Emerging markets were holding a record $6.3 trillion in dollardenominated debt last year, according to IIF data. JPMorgan ‘s index for emerging-market bonds denominated in dollars has fallen about 4% this year, driving up yields and essentially erasing any excess return that investors were earning by holding local currency emerging-market bonds. Yields rise as prices fall. The IIF now expects foreign portfolio debt flows to fall about 20% this year to $255 billion.
“It is enough of a risk that we’ve cut our forecast for portfolio debt flows this year for emerging markets,” said Sonja Gibbs, IIF senior director of global capital markets.
Emerging markets added on $7.7 trillion in new debt last year, including bonds and other types of loans, with about $800 billion of that denominated in foreign currencies
Source: The Wall Street Journal