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May 07, 2014 at 02:23 PM
(Bloomberg) — Remember when bond investors were fleeing emerging markets, convinced the debt was doomed in an era of less Federal Reserve stimulus?
That was so 2013. This year the notes may be among the best bets, particularly those with longer maturities and denominated in dollars. Here’s why: Emerging-market bonds are paying an average of 1.5 percentage points more than similarly rated U.S. corporate debt. And there’s growing demand for it right now as confidence builds that this cycle of repressed borrowing costs isn’t ending any time soon.
Jeffrey Gundlach, chief executive of the $50 billion investment firm DoubleLine Capital LP, said he’s “quite bullish” on such debt. “The flows underlying longer-dated emerging-market debt are incredibly strong,” he said yesterday in an interview with Matthew Winkler, editor-in-chief of Bloomberg News, at Bloomberg LP’s New York headquarters.
Some of the demand is coming from investors like the Illinois Municipal Retirement Fund, which opted to shift $200 million from high-yield bonds to a money manager focused on emerging-market debt, according to March 28 meeting minutes.
In June 2013, dollar-denominated, emerging-market bonds plunged 4.1 percent, a bigger decline than for either U.S. high- yield or investment-grade notes, according to Bank of America Merrill Lynch index data. That was largely a knee-jerk response to the Fed’s plan to taper monthly bond purchases, slowing a program that’s fueled demand for riskier assets.
Extra Yield
The Fed has slowed the pace of its debt buying, yet the worst-case scenario of soaring yields has failed to materialize. The opposite has happened, with 10-year Treasury yields falling to 2.58 percent from 2.84 percent on Dec. 17, the day before the U.S. central bank announced its taper.
While emerging-market notes have gained 4.3 percent this year, they still haven’t caught up with U.S. corporate debt with similar BBB ratings, which has returned 5.4 percent, Bank of America Merrill Lynch index data show.
And bonds of developing nations still yield 1.5 percentage points more than their comparably rated U.S. company counterparts. That’s an extra 0.5 percentage point above what investors have demanded on average to own the debt during the last five years.
