Recently, there has been an increase in investor interest in emerging market (EM) bonds. Because high interest rates and inflation in the US make them more attractive compared to dollar assets. About this write Bloomberg.
In the first four months of this year, investors pulled $2,65 billion from funds holding EM bonds in hard currencies, mostly in dollars, but put $5,23 billion into bond funds in other countries' local currencies, according to data provider EPFR Global.
These processes indicate a reversal of a multi-year trend among investors who preferred debt obligations in US dollars, as a strong dollar generally provided higher returns with lower risks. But that has changed this year, with local bonds elsewhere showing stronger momentum as currencies including the Mexican peso and Brazilian real strengthened more than 10% against the dollar.
"Local markets are far ahead of foreign debt," he said Paul Greer, emerging market debt portfolio manager at Fidelity International. "Frankly, I think that this trend is likely to continue until the end of the year."
JPMorgan's target EM benchmark for local currency government bonds has delivered a total return of 6,8% this year, beating its hard currency peers, which rose 1,9%.
Analysts note that much of this growth is due to the dollar's weakness in 2022 against many major emerging market currencies, which in turn offer a higher rate of return. In foreign exchange markets, such an increase in profit is called a "carry trade".
"Carry trade is in the center of attention today," he believes Manik Narain, UBS's Chief Emerging Markets Strategist. "There is a consensus to be short the dollar, based on the assumption that the Fed has reached the end of the tightening cycle."
Jay Powell, chairman of the US Federal Reserve System, said the central bank is preparing to delay another rate hike next month. However, the Central Bank is more cautious about the timing of rate cuts.
Kamakshya Trivedi, head of FX, rates and emerging markets strategy at Goldman Sachs, believes investors are still interested in such deals.
"It is believed that the pause in the actions of the Fed should reduce the volatility of interest rates and create opportunities for investors to earn a risk premium in the high-yielding foreign exchange markets of developing countries," he added
While some analysts believe that EM currencies are unlikely to continue to outperform the dollar, especially amid concerns about the US debt ceiling or a US recession, many still see reasons to hold local currency bonds.
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