Emerging Debt Beats Treasuries for Aviva as Volatility Looms

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  • Asset manager favors Indonesian, Russian and Brazilian bonds
  • Investors rotating from dollar notes to local-currency debt

The conventional wisdom that U.S. Treasuries are a safe haven doesn’t quite work right now for Aviva Investors.

Local-currency bonds in emerging markets are more attractive because they are less susceptible to risk events than developed-market notes, particularly U.S. sovereign bonds, said James McAlevey, a senior fund manager for fixed income at the U.K. asset manager. As the Federal Reserve starts to shrink its balance sheet and more price-sensitive buyers like pension funds and insurers come to the fore, volatility in the Treasuries market is overdue for a comeback, he said.

Local-currency sovereign notes in emerging markets have attracted investors amid prospects for improving growth and slowing inflation in developing countries. The Bloomberg Barclays EM Local Currency Government Index has climbed 12 percent this year, outperforming the 2.2 percent gain in an index tracking Treasuries.

“For the first time in a long while, we’re basically seeing some long-term credible stories with decent real yields attached” for emerging markets, London-based McAlevey said in an interview in Singapore. “We just don’t believe in developed markets you’re being paid to take that risk.”

Many investors are rotating from emerging dollar notes, where spreads have tightened, into local-currency securities, Stuart Ritson, Singapore-based head of Asian FX and rates at Aviva, which oversaw the equivalent of $450 billion at the end of 2016. Countries where inflation is moving structurally lower, such as Indonesia, Russia and Brazil are especially attractive, he said in the same interview.

As volatility returns to the world’s biggest bond market, the Merrill Lynch Option Volatility MOVE Index, which measures expected U.S. bond price swings, could potentially rise 50 percent over the next year or two, McAlevey said. Possible catalysts for big moves in the market could be the appointment of a new Fed chair or what happens to the U.S. tax plan, he said.

Read More: Only New York or China Can Spur EM Contagion, Rest Is Just Noise

“The strength of performance is beginning to really awaken investors minds to the fact that local currency is an attractive asset class,” Ritson said. “Looking across valuations of all assets, they’re quite rich, but in local markets they’re still quite attractive.”

The MSCI gauge of emerging-market currencies rose 0.1 percent as of 11:15 a.m. in New York.

— With assistance by Aline Oyamada

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