Emerging-Market Bulls See Danger as Juicy Bond Yields Fade

Updated on
  • Mean-revision trade looks vulnerable after 18-month rally
  • Newfleet Asset Management abandoning overweight position

Developing-nation bonds may be losing their luster.

After an 18-month bull run in emerging markets produced more than twice the return of sovereign notes from developed countries, one measure of valuation shows there isn’t much juice left. Yield spreads are approaching their average of the past seven years, a bearish signal to traders who buy when they’re higher in hopes of a reversal.

Investors are scouting for signs of a crack in the tranquility that has dominated global markets since late last year in an effort to get ahead of any selloff that will bring the whole party crashing down. Steve Hooker, who helps oversee $12 billion of assets as an emerging-market money manager at Newfleet Asset Management in Hartford, said the faltering of the so-called mean-revision trade encouraged him to pull back on what had been an overweight position in developing-nation debt.

“I take notice when every investor seems to love emerging markets and no one seems to be skeptical,” he said. “With spreads having tightened, key elections looming in 2018 and developed market central banks stepping away from accommodative policy, I’m turning a bit more cautious.”

The MSCI Emerging Markets Currency Index fell 0.3 percent at 11:22 a.m. Monday in New York.

— With assistance by Carlos Torres

(Adds move with MSCI index in last paragraph.)
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