Traders Lured by High-Yield ‘Sweet Spot’ in Emerging Markets

  • PineBridge likes local emerging-market debt with high rates
  • ETF focused on the category posted best month since Dec.

Traders are gaining confidence in nations that pay the steepest local interest rates.

Investor anxiety, as measured by one-month implied currency volatility, dropped to multi-month lows last month in Russia, South Africa and Brazil -- countries with some of the most generous yields on their local government debt. Those nations are benefiting from demand for their bonds as interest rates in the developed world stay suppressed amid a pickup in prices for the commodities they export, including gas, gold and copper.

“Emerging markets are truly in a sweet spot," said Anders Faergemann, a senior fund manager in London at PineBridge Investments, which oversees about $80 billion globally.

Currency volatility is a major factor for investors putting their money into local emerging-market debt, since the advantages of higher interest rates can be wiped out if there’s a sharp drop. Steeper borrowing costs in the developed world could constrain emerging-market dollar bond returns, making high-yielding local notes more attractive near-term.

The iShares Emerging Markets High Yield Bond ETF, which aims to track Morningstar’s index for high-yield developing-nation debt, returned 1.9 percent last month, or an annualized equivalent of 24 percent, the best performance since December. It rose 0.1 percent at 11:14 a.m. in New York on Tuesday.

“Despite the weaker economic momentum and more geopolitical noise, we expect the overall macro backdrop to remain healthy for emerging markets in the coming months,” Michael Bolliger and Lucy Qiu, analysts at UBS Wealth Management’s Chief Investment Office, wrote in a note. They’re overweight in high-yield emerging-market sovereign bonds.

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