Emerging-Market Local Bonds Draw Record Funds on Currency Gains, Economies

Global investors are pumping record amounts of money into developing nations’ domestic bonds this year, attracted by improving economies and currency gains.

Funds investing in emerging-market local-currency debt have attracted $16.9 billion of net inflows so far, more than triple the record annual intake of $5 billion recorded in 2007, according to Cambridge, Massachusetts-based EPFR Global. The International Monetary Fund last month forecast economic growth for developing countries of 6.8 percent this year, compared with 2.6 percent for industrialized nations.

Benchmark interest rates in the U.S., 16-nation euro region and Japan are 1 percent or less, compared with a minimum 4.5 percent in Brazil, Russia, India and China, the so-called BRIC nations that are the world’s largest developing economies. The Japanese yen is the only developed-nation currency among this year’s 10 best performers and trails gains of 12 percent in the Colombian peso and 8.2 percent for Malaysia’s ringgit.

“Investors are diversifying into emerging markets, expecting appreciation of the local currencies,” said Anton Hauser, who helps oversee the equivalent of $1.7 billion of such debt for Erste Sparinvest KAG in Vienna. “With all the problems in developed countries, it’s a good strategy.”

Concern some European nations will struggle to pay their debts led to debt-rating downgrades for Greece, Portugal and Spain this year, while Moody’s Investors Service in May said the U.S. may lose its top grade unless more is done to trim the budget deficit. Emerging-market economies including Argentina, Chile, India and South Korea have won upgrades.

The extra yield investors demand to own developing nation debt instead of U.S. Treasuries fell to 2.73 percentage points yesterday, according to JPMorgan Chase & Co.’s EMBI+ Index. The spread averaged 4.24 points in the past two years.

JPMorgan’s GBI-EM Global Diversified Index, which tracks developing nations’ domestic debt, has gained 10 percent this year. Asian securities have handed investors a return of 15 percent in dollar terms, while those in Latin America gained 14 percent. Debt in Europe’s emerging markets rose 0.3 percent.

To contact the reporter on this story: David Yong in Singapore at dyong@bloomberg.net; Lilian Karunungan in Singapore at lkarunungan@bloomberg.net.

• Tweet
• More
  • Business Exchange
  • Buzz up!
  • Digg
• Print
• Email