JPMorgan Pits Emerging Bonds Against Treasuries in New Index

  • Biggest global funds built large off-benchmark EM positions
  • Broad adoption of benchmark would spur new buying wave: Erste

Long relegated to the fringes of bond investing, emerging markets have just been thrust into the mainstream by JPMorgan Chase & Co., in a clear repudiation of negative-yielding developed markets.

The investment bank has put local sovereign debt of developing nations at the heart of a new global bond index, accounting for 20 percent of allocations. Since similar gauges recommend about 2 percent weighting to emerging markets, wide adoption by global money managers and exchange-traded funds has the potential to set off a new wave of buying, according to Morningstar Inc. A rally cut average yields on local-currency bonds by 50 basis points to 4.25 percent in the past year.

“If investors decide to use this benchmark this would clearly be supportive for emerging markets,” said Anton Hauser, a money manager in Vienna who helps oversee $2 billion at Erste Asset Management and incorporates JPMorgan gauges into his modeling. “It’s way higher than in traditional indexes.”

Global Rethink

From insurers and pension funds to sovereign wealth funds, investors have sought out local-currency debt of developing nations to replace income drained by sub-zero yields. At a time when investors have to pay to hold $11 trillion of the world’s bonds, money managers are being forced to revamp investment strategies by venturing further afield to meet return targets. 

Global investors that traditionally focused on developed countries boosted positions in emerging nations including in hard-currency assets to as much as 16 percent in June, from 14 percent a year earlier, according to a Morningstar survey of 96 U.S.-domiciled global funds. Pacific Investment Management Co. more than doubled holdings in its $14.9 billion global fund from March through July, to just over 10 percent.

“The biggest global fixed-income shops have been taking large off-benchmark positions and that has been quite difficult for allocators to model in those funds,” said Mark Preskett, a portfolio manager at Morningstar Investment Management in London. “There isn’t a globally recognized index out there where a fund manager can seek to outperform which has such a high weighing in emerging-market debt.”

JPMorgan’s index tracks $25 trillion of securities from 37 nations, with a weighted average yield of 1.35 percent, the firm said in a statement Monday.

While a fifth of the benchmark is devoted to emerging markets, another fifth carries negative yields. That will allow investors to assess local-currency notes of South Korea, Brazil and Mexico alongside bigger index members such as the U.S. and Japan, according to its developers. Brazil’s 10-year treasury notes yield 11.65 percent, the most among major emerging markets tracked by Bloomberg. That compares with 1.73 percent for similar-maturity U.S. Treasuries.

Bloomberg LP, the owner of Bloomberg News, competes with JPMorgan, Bank of America Merrill Lynch and others in providing fixed-income indexes.

“Emerging markets have become more mainstream,” said Gloria Kim, head of the global index research group in New York. “Given the negative-yield environment, it will be important to look at emerging markets more closely as part of the strategic allocation.”

The litmus test for the new benchmark will be whether ETFs adopt it and launch funds based on it, Preskett said. Investors hunting for yield have plowed a record $12.7 billion this year into ETFs that focus on emerging markets, according to BlackRock Inc. That compares with a previous full-year record of $8.3 billion in 2012.

“Finally someone is actually recognizing emerging markets,” said Jan Dehn, head of research at London-based Ashmore Group Plc. “It’s real progress.”

— With assistance by Natasha Doff

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