Bond investors pull money from emerging markets
Emerging market bond funds suffered the first two-week spell of outflows since 2016, as a stronger US dollar raised fears about companies’ ability to repay dollar-denominated debt.
Investors withdrew almost $1 billion from global emerging market bond funds for the week ending May 2, according to data from EPFR Global, the largest outflow since February’s market turmoil and the first time the asset class has suffered two consecutive weekly outflows in 16 months, ft.com wrote.
The data underscores the widening fallout from the rise in the dollar. The US currency has risen 2.7 percent since the start of April against its developed market peers, while Jpmorgan’s EM currency gauge is down by 4.2 percent against the greenback. A stronger dollar raises costs for emerging market companies servicing dollar-denominated debt.
On Thursday, Argentina’s central bank increased its interest rates by three percentage points for a second time in less than a week, in a bid to halt the peso’s fall against the US dollar. It is down 9.4 percent since the start of April, almost all of the decline coming in the past week.
The Brazilian real has weakened 6.3 percent since the start of April to just 3.52 per dollar, while the Mexican peso is down 4.6 percent over the same period.
Rising US interest rates pose another headwind for markets in the developing world. The benchmark 10-year Treasury yield has climbed 55 basis points this year to 2.95 percent, having briefly moved above three percent at the end of April. Higher US rates reduce the value of dollardenominated emerging market bonds, making them less attractive assets for investors to hold.
“In 2017 everything was going right for emerging markets...[but] people got scared when the 10-year Treasury yield crossed three percent,” said Federico Kaune, head of emerging market debt at UBS Asset Management. “If yields come back down you’ll see people come back to EM.”
Global emerging market stock funds have fared better, despite the rising dollar reducing the value of investments made in local currencies. The fund group posted $333 million of inflows but the trend since the beginning of 2018 has still been one of decline, with appetite well down from the $5.3 billion of inflows seen at its peak for the year in January.