Treasuries threat to emerging markets

March 6, 2013

Emerging market issuers have been busy this year, but investors aren’t getting much of a return, as rising Treasury yields steal their lunch.

Joyce Chang, head of emerging markets research at JP Morgan, told the Emerging Market Traders’ Association yesterday that:

Returns are lacklustre, barely breaking positive territory.

This despite the fact that there has been $62 billion in emerging market issuance in the first two months of the year, compared with last year’s record totals of $333 billion.

The problem is that improving U.S. growth prospects and expectations that the Federal Reserve will take the brake off the money-printing pedal have improved the investment and yield appeal of developed world assets.

As Chang said:

It seems the Ben Bernanke plan is working.

Ten-year Treasury yields have risen as much as 40 basis points this year, breaching 2 percent last month. Emerging sovereign debt spreads have widened 30 bps in that time. High-yield issuers have been out in force as result, with emerging market high yield issuance of $26 billion this year already close to full-2012 levels, according to Chang.

Unfortunately I couldn’t stay long at EMTA – sorry about the coughing fit, everyone – but Maarten-Jan Bakkum, emerging markets strategist at ING Investment Management, also said U.S. Treasuries were a worry. Emerging equities too have disappointed this year, with returns barely in the black.

On a visit to the Reuters building yesterday, Bakkum, who is neutral on emerging markets, said:

 Rising U.S. yields are potentially a big problem for flows to emerging markets. They reflect the better growth environment and increase the chances that the Fed will take liquidity off the table. You can expect more nervousness in emerging markets.

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