Online Extra: Emerging-Market Bonds Stay Hot

The party isn't over yet, says fund manager Kristen Ceva, who sees particular promise in Russia and Mexico

Fueled by double-digit gains, emerging-market equities have garnered a great deal of attention in the past few years. But emerging-market bonds are also shining bright. The category ranks as the best-performing fixed-income group in 2005, with a gain of 3.7% through June 10. Lauren Young, BusinessWeek Personal Business editor, recently caught up with Kristen Ceva, manager of the $62 million Payden Emerging Markets Bond Fund. Edited excerpts of their conversation follow:

Q: The emerging markets have had a long run of outperformance. Can it last?


Is this the end of the party? I've gotten that question for the last five years. It just continues to do well, and it's really because it's a secular change. I don't expect yield spreads to revert to the mean. There's a change in the political and economic fundamentals, and an improvement in ratings. Almost half of the market cap in our benchmark index is investment-grade.

Q: What's in the fund?


Mainly we have dollar-paid, sovereign debt from Latin American, Eastern Europe, and Asia. We also opportunistically use local-currency debt. We've got about 16% of the fund in local-currency debt right now, and also about 20% in emerging-markets corporates.

Q: What has performed well in 2005 so far?


This year is a mixed bag. The outperformer in terms of countries is Russia. Mexico also has done well. The local-currency debt, particularly in Mexico, has done well. But it has been a volatile year. Yield spreads backed up in March, along with the general problems in the credit markets with General Motors (GM ) and other companies. We do see a lot of value in Latin America. There's a place where you'll see some spread tightening as the year goes on.

Argentina defaulted on its debt in 2001, and it has finally gone through its restructuring. We really had sold out of Argentina in 2001. Then we bought a bit for the when-and-if market. Some of those bonds have traded well. We've traditionally not done much in triple-C quality debt in Latin America. I think there's a lot of value in some of the external debt still. In the local markets, some of our local-currency plays are in Colombia, Peru, and Brazil.

Q: What about Eastern Europe?


In Eastern Europe, spreads are tighter than in Latin America. A lot of these countries are European Union convergence countries. They'll enter the EU in 2007. We've done different plays in local markets. In Turkey, you are getting 16% to 17% yields on short T-bill types of government debt. In the Ukraine, yields were 12% in December -- now they are 6%, based off Yushchenko's victory.

Q: How are you playing corporate debt?


On the corporate side, we are sticking with higher-quality names. The spreads over sovereigns justify taking corporate risk. We own Pemex in Mexico, Companhia Siderúrgica Nacional (SID ) in Brazil, and Phillipine Long Distance Telephone Co.

Q: How diversified is the fund?


We tend to have exposure to 15 different countries and about 40 different issues. And it's well-diversified in both country exposure and regional exposure. We have less Asian debt than we traditionally did in the past. That's a function of the market -- spreads are quite tight.

Q: Has the dollar rebound affected the fund at all?


We have really been doing quite well even with the dollar rebound against the euro. The Mexican peso rallied a lot. So has Brazil's real. The Turkish lira has done well. Despite "no" votes, people still think they'll enter the EU.

Q: Is there anyplace you're staying away from?


We haven't been involved with Ecuador because of the political situation there. The President was pushed out a few months ago, and that has created a lot of instability.

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