If investors wanted evidence that demand for local-currency bonds isn’t fleeting, here it is: the biggest exchange-traded fund tracking local debt in emerging markets has seen 17 weeks of inflows.
The $9.7 billion iShares JP Morgan EM Local Government Bond UCITS ETF had net deposits of $341 million last week, the most since Feb. 8, as the Federal Reserve’s dovish stance and progress in U.S.-China trade talks spur demand from some of the world’s biggest money managers. This week inflows slowed, but still totaled $20 million through Thursday.
Investors meanwhile pulled $251 million from the largest ETF for emerging-market dollar bonds last week, bringing outflows for April to $1.6 billion, the most in more than a year.
“The dollar does not need to be super weak for emerging market local-currency bonds to be a good investment,” said Eric Stein, Boston-based co-director of global income at Eaton Vance Corp., which manages $460 billion of assets. “Even in an environment of moderate dollar strength, local bonds can generate good returns and we are positioned for that with them seen to outperform dollar bonds.”
JPMorgan Chase & Co. said that its clients had increased their exposure to emerging currencies in April to the highest level since May 2018. They were overweight the South African rand, Russian ruble, Brazilian real, Nigerian naira and the Egyptian pound.
“Some local-bond curves are steep, so they’re fairly attractive,” said Magdalena Polan, a strategist at Legal & General Investment Management in London. “Central banks are dropping hawkish guidance or even moving toward easing, so that’s good for bonds and would be a good opportunity in those EMs that can ease.”
Local bonds have some catching up to do. They’ve returned investors 1.8 percent this year in dollar terms, which compares with 6.1 percent for emerging-market dollar bonds. The equity benchmark has rallied 11.6 percent.
With local rates, “we can still witness a substantial positive gap between emerging-market and developed-market real yields,” said Carl Ross and Victoria Courmes, Boston-based analysts at Grantham Mayo Van Otterloo & Co. “Valuation metrics for emerging external debt are less compelling than they were at the beginning of the year, due to the rally.”
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