Red year for emerging bonds
What a dire year for emerging debt. According to JPMorgan, which runs the most widely run emerging bond indices, 2013 is likely to be the first year since 2008 that all three main emerging bond benchmarks end the year in the red.
So far this year, the bank’s EMBIG index of sovereign dollar bonds is down around 7 percent while local debt has fared even worse, with losses of around 8.5 percent, heading for only the third year of negative return since inception. JPMorgan’s CEMBI index of emerging market corporate bonds is down 2 percent for the year.
While incoming Fed boss Janet Yellen has assured markets that she doesn’t intend to turn off the liquidity taps any time soon, JPMorgan still expects U.S. Treasury yields to end the year at 2.85 percent (from 2.7 percent now). That would result in total returns for the EMBIG at minus 7 percent, the CEMBI at minus 2 percent and GBI-EM at minus 7-9 percent, JPMorgan analysts calculate.
While the EMBIG index spread over Treasuries has been fairly resilient during risk-off bouts in the recent past, it is under pressure now from weakness in Ukraine and Venezuela, two of the highest-yielding components which together comprise almost 20 percent of the index. Across the three sectors, investors remain wary – they have yanked out cash more or less steadily for the past 25 weeks and outflows equate to around 12.3 percent of assets under management, data from EPFR Global shows.
As for next year, JPM does not expect things to get much better for any of the three indices. We wrote here last week on the higher debt supply expected in 2014, including from high-yield issuers in Africa and central America. JPM writes:
The path higher in global rates, only slow improvements in emerging market (EM) fundamentals, and a wave of EM elections will slow the retracements of this year’s spread widening. Overall this outlook argues for a more neutral stance on EM sovereigns.
In local currency debt, JPM advises clients to reinstate a 5 percent hedge on emerging currencies. With a long-term dollar uptrend very much in place, emerging currency weakness is likely to take a heavy toll on any returns investors may expect from duration.