No Alternative to Emerging Debt Puts Holdings at 4-Year High

  • Emerging markets now make up 16.5% of U.S. global bond funds
  • Near-zero rates push money managers toward higher EM yields

Global bond funds now have more money invested in emerging-market debt than at any time in the past four years.

The average allocation to developing-nation bonds jumped to 16.5 percent in July, according to Morningstar Inc. Holdings have climbed almost four percentage points since the beginning of the year, the data set of 96 U.S.-domiciled global funds showed.

Near-zero rates in the developed world have driven money managers to emerging-market bonds with yields on average about nine times higher than the developed-country assets that make up the bulk of their portfolios. Inflows are likely to continue despite the possibility of an interest-rate increase by the Federal Reserve this year as monetary stimulus in Europe fuels demand for riskier assets, according to Regis Chatellier, a strategist at Societe Generale SA.

“There’s no real alternative to emerging markets,” said London-based Chatellier, who recommends buying high-yielding sovereign bonds such as Brazil and Colombia. “You’ve got negative and very low yields across the board and asset managers have to do something or they won’t be able to make returns.”

Emerging-market dollar sovereign bonds have returned about 7.6 percent in the past three months and yield an average of 4.2 percent, according to a Bloomberg index. Developed-nation bonds have advanced 5.3 percent in the period and yield 0.48 percent. About $25 billion has flowed into developing-nation debt funds since the beginning of June, according to EPFR data.

Twelve of the 18 biggest global bond funds tracked by Morningstar raised allocations to the developing world in the first half. Pacific Investment Management Co. more than doubled holdings in its $14.9 billion global fund from March through July, while Franklin Templeton’s $47.2 billion Global Bond Fund boosted its exposure to emerging markets by 5 percentage points to about 51 percent in the second quarter.

To find out more about global bond funds migrating into developing economies , click here.

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