Victims of the dollar’s strength are piling up.
Total returns on emerging market local currency bonds dipped into the red for the first time this year, according to data from JPMorgan which compiles the flagship GBI-EM global diversified index of domestic emerging debt. While the EMBI Global index of sovereign dollar debt has already taken a hit the rise in U.S. yields, local bonds’ problems are down to how EM currencies are performing against the dollar.
JPMorgan points out that while bond returns in local currency terms, from carry and duration, are a decent 1 percent, that has been negated by the 1.3 percent loss on the currency side. With the dollar on the rampage of late (it’s up almost 4 percent in 2013 against a grouping of major world currencies) that’s unsurprising. But a closer look at the data reveals that much of the loss is down to three underperforming markets — South Africa, Hungary and Poland. These have dragged down overall returns even though Asian and Latin American currencies have done quite well.
The graphic below shows South African local debt bringing up the bottom of the table, with the FX component of returns at around minus 9 percent In rand terms however the return is still in positive territory, but only just. Hungary and Poland fare only slightly better.
Many bond positions are of course hedged. But as we wrote here yesterday in an article on South Africa, escalating currency weakness can trigger exits from local bond markets. And worryingly, JPMorgan notes that returns in local currency terms have plateaued at 1 percent over the past 10 days.