Emerging-market bond buyers are back in town.
Exchange-traded fund investors poured $887 million into strategies tied to the asset class last week amid the U.S. Federal Reserve’s even more dovish turn in policy. Leading the pack was the $16.9 billion iShares J.P. Morgan USD Emerging Markets Bond ETF, or EMB, which took in $539.7 million, bringing the total in January to $1.7 billion, the most in a year.
Investors are probably taking comfort in the prospect that Fed’s dovishness will weaken the dollar, which would make it easier for emerging-market companies that earn revenue in local currency to pay back their overseas debt. At the same time, the outlook for steady borrowing costs in the U.S. makes higher-yielding developing-nation debt more appealing.
“The hunt for yield continues and if anything it’s become more pronounced now that the Fed has suggested it will be ‘patient,’' Kristina Hooper, the chief global market strategist at Invesco Ltd., said in an interview at Bloomberg’s New York headquarters. “We’re going to need to be less traditional, less conventional if we want to derive enough yield, and I think that’s what’s driving investors to areas like emerging-market bonds.”
Part of this demand stems from the beaten-down nature of emerging markets after a particularly rough 2018, according to research from Bloomberg Intelligence that said this year’s flows probably “reflect bottom-feeding.” The Bloomberg Barclays Emerging Markets Hard Currency Aggregate Index lost 2.5 percent last year, the worst performance since 2013.
Bond ETFs with international exposure more generally attracted cash as well. The $13.7 billion Vanguard Total International Bond ETF took in $338 million, its largest weekly inflow in over a year. The fund, which trades under the ticker BNDX, has over 20 percent of its holdings in Japanese debt and about 12 percent of its assets are French bonds.
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