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January 10, 2018 at 01:46 PM
The world’s largest publicly traded hedge fund is turning wary on emerging-market dollar bonds after the securities rallied the most since the global financial crisis.
Investors have plunged into riskier assets in their hunt for yield, and now face mounting risks, according to Man Group P.L.C., which managed $103.5 billion of assets as of Sept. 30. This week has brought fresh examples. Japan’s largest life insurer, Japan Post Insurance Co., plans to start buying sovereign and investment-grade corporate bonds in developing economies as early as this quarter, managing director Takayuki Haruna said in an interview.
The appeal of developing debt increased in recent years after central banks globally remained accommodative and kept interest rates near historical lows. That has sent the premium on emerging-market dollar bonds to the lowest since 2007, according to a Bloomberg Barclays index. While some money managers forecast the market will cool, others say developing bonds and equities will continue to streak ahead.
“This has resulted in fairly indiscriminate spread compression, pushing valuations on emerging-market dollar bonds to levels that no longer make sense when considering the credit and liquidity risks, particularly for the high-yield segment of the asset class,” said Lisa Chua, a portfolio manager on the emerging-markets debt team at Man Group, in an interview by email.
(Related: Latin America’s Pensioners Are Getting Greedy)
As the Federal Reserve is poised to raise rates further and other central banks hint that they may reduce stimulus in the near future, Man Group isn’t alone in sounding the alarm on junk debt.
