Emerging Markets: Emerging Market Bonds Have Unusual Appeal

Investor: News

By Gordon Platt

Emerging market debt has a unique attraction for investors seeking higher yields than are available on US treasuries but who lack the appetite for risk in volatile emerging market equities. Investors are pouring record amounts into emerging market bonds this year. “There is a difference in the risk profile between bond holders who are saving for retirement and equity investors,” says Daniel Tenengauzer, head of global emerging markets fixed-income strategy at Bank of America Merrill Lynch. “The combination of emerging markets and bonds makes it more complicated,” he says.

Long-term investors in bonds, such as pension funds, do not unwind their positions in times of market uncertainty, Tenengauzer says. “This gives emerging market bonds appeal to foreign investors at times like this,” he says. “Local investors hold onto the bonds, so they are less volatile.”

Fears that Greece’s fiscal problem could raise borrowing costs and plunge Europe back into recession caused a reassessment of risk in emerging markets in early May, according to EPFR Global, which tracks fund flows. Emerging market equity funds sustained outflows of $2.1 billion in the seven days through May 12. Investors committed only a net $22 million to emerging market bond funds in the same period, but there was still a positive flow.

The fiscal ratios in emerging market economies are better than in the developed world, Tenengauzer says, adding that he favors Asia and Latin America, including such countries as Mexico, South Korea and Indonesia.