JPMorgan Downgrades Emerging Dollar Debt as Yields Fall

JPMorgan Chase & Co. cut its recommendation on emerging market dollar-denominated government bonds to neutral, as investors withdraw funds and falling yields limit returns.

JPMorgan downgraded the debt from overweight, analysts led by Joyce Chang wrote in a report dated yesterday. The New York-based bank kept a buy recommendation on local-currency bonds in developing nations and advised clients to maintain bets on gains in emerging-market currencies, including the South Korean won, the Indian rupee and South African rand.

Funds focused on emerging-market dollar debt experienced outflows in three of the past five weeks, a scenario last seen in May, according to the JPMorgan report. The bank’s EMBI Global Index of developing-country dollar notes has dropped 1.7 percent this year, as yields fell to a record-low 4.4 percent in January, cutting their advantage over U.S. Treasuries.

“We believe the market may be due for some consolidation, with the most crowded positions appearing more vulnerable,” the analysts wrote. “Return opportunities for investment-grade emerging-market sovereign debt are more limited.”

Investors in emerging markets will continue to shift funds out of sovereign dollar debt and into local-currency and corporate bonds because of the higher returns, the analysts said. Emerging dollar debt yielded 4.84 percent yesterday, compared with 5.51 percent on local-currency notes and the 4.58 percent yield for corporate bonds, according to JPMorgan’s indexes.

A JPMorgan survey last month showed investors reduced holdings of emerging-market government debt to the lowest level since October 2008 as rising U.S. Treasury yields eroded the allure of the assets.

Venezuelan Debt

Yields on 10-year U.S. Treasuries touched 2.08 percent today, the highest level since April 2012 based on closing prices, after a government report showed U.S. employers added more jobs than forecast and the unemployment rate in the world’s largest economy unexpectedly fell to four-year low.

JPMorgan recommends investors retain an overweight position in Venezuelan bonds, as the yields, currently at 9.67 percent, are high enough to compensate investors amid uncertainty over the political climate following President Hugo Chavez’s death this week.

Investors should be underweight Argentinean debt, JPMorgan says, citing legal risks as the government fights a group of bondholders demanding payments on securities related to the nation’s 2001 default in a U.S. court. High-yielding corporate bonds from companies including Petroleos de Venezuela SA and Mexico’s Cemex SAB de CV, as well as Russian financial companies will probably gain, according to the report.