EM dollar bond investors feeling Treasuries heat

February 8, 2013

The recent, steady upward creep in U.S. Treasury yields is starting to have an effect on appetite for high-yield credit, investors’ favourite for over a year.

Emerging dollar bond funds have suffered capital outflows for the first time since June 2012, waving goodbye to around $300 million in the week to Feb 6, according to EPFR Global, the Boston-based fund tracker.  Global  high-yield bond funds saw net outflows of $1.33 billion, and according to another set of data from JPMorgan, emerging market hard currency ETFs (exchange traded funds)  saw net outflows of $550 million.  JPMorgan notes:

Amid U.S. Treasury volatility, EM credit has suffered both on total returns as well as fund flows.

Assets like emerging market debt tend to suffer when Treasury yields, the so-called risk-free rate, rise. Ten-year U.S. yields recently broke over 2 percent for the first time since last April, having risen more than 30 basis points since early December. They have since eased to 1.94 percent but many reckon that signs of economic recovery as well as some inflation fears will lead to a further selloff in Treasuries. JPMorgan for instance expects the 10-year yield to reach 2.25 percent this year.

Emerging dollar bonds which returned 18.5 percent last year are in the red this year with losses of 1.6 percent while last week alone they lost 0.6 percent, JPM data shows.

Moves in U.S. Treasuries haven’t entirely soured the emerging markets story, however.  Funds investing in domestic EM bonds, denominated in emerging market currencies, took in $1.3 billion in the past week and year-to-date EM fixed income has received almost $10 billion. And emerging equity funds absorbed a net $3.43 billion in the week to Feb 6, the 22nd consecutive week of net inflows, EPFR notes.

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/