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'Next shoe to drop' for EM bond markets
The 'bloodbath' that took place in emerging market bonds last week may not be the last of the outflows, analysts warn
After the first outflow from emerging market debt in nearly a year, more could be on the way, depending on investors' sentiment towards risk.
The outflow from emerging market bond funds was $866 million in the week ending on May 29, according to UniCredit, with inflows into local currency debt unable to offset outflows from hard currency.
"There has already been some significant stress in most local bond markets over the past few weeks, but we fear it could get even worse in the period ahead," Benoit Anne, head of emerging markets strategy at Societe Generale, warned.
The "next shoe to drop" in his opinion could be "real-money capitulation," where investors such as pension funds would rush to the exit in local bond markets.
Analysts have been warning about such a risk since last year but yields on emerging market debt kept falling as investors piled into the asset class, in search for higher returns as major central banks slashed interest rates to near zero and printed money.
Anne believes that previously popular investment destinations such as Turkey, Hungary, Russia or Mexico are at risk if a rush to the exits materializes.
"We are now bearish outright on most EM currencies, and no longer recommend exposure to EM bond markets," he wrote in an update to investors. "We are out of most of our long bond recommendations, including in Russia."
"It is too early for a buy-on-dips strategy as we believe the stress will continue to escalate in local bond markets."
David Simmonds, head of currency and emerging markets strategy at RBS, says that last week's outflows represent "potentially the merest drop in the ocean."
"There is scope for more blood on Illiquidity Street in Narrow Exit Window City: Aussie, SEK, MXN, BRL, KRW, INR, PLN, MYR are vulnerable to more outflow," Simmonds wrote in a currency strategy note.
But he pointed out that some important elements that induced the risk-on, high liquidity environment were still in place.
These are the "miserable" eurozone data that are likely to determine the European Central Bank to ease monetary policy further, falling commodity prices, many central banks around the world cutting interest rates and low inflation in the US which might mean the Federal Reserve's easy money policy could continue.
- Follow us on twitter @emrgingmarkets
The outflow from emerging market bond funds was $866 million in the week ending on May 29, according to UniCredit, with inflows into local currency debt unable to offset outflows from hard currency.
"There has already been some significant stress in most local bond markets over the past few weeks, but we fear it could get even worse in the period ahead," Benoit Anne, head of emerging markets strategy at Societe Generale, warned.
The "next shoe to drop" in his opinion could be "real-money capitulation," where investors such as pension funds would rush to the exit in local bond markets.
Analysts have been warning about such a risk since last year but yields on emerging market debt kept falling as investors piled into the asset class, in search for higher returns as major central banks slashed interest rates to near zero and printed money.
Anne believes that previously popular investment destinations such as Turkey, Hungary, Russia or Mexico are at risk if a rush to the exits materializes.
"We are now bearish outright on most EM currencies, and no longer recommend exposure to EM bond markets," he wrote in an update to investors. "We are out of most of our long bond recommendations, including in Russia."
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"It is too early for a buy-on-dips strategy as we believe the stress will continue to escalate in local bond markets."
David Simmonds, head of currency and emerging markets strategy at RBS, says that last week's outflows represent "potentially the merest drop in the ocean."
"There is scope for more blood on Illiquidity Street in Narrow Exit Window City: Aussie, SEK, MXN, BRL, KRW, INR, PLN, MYR are vulnerable to more outflow," Simmonds wrote in a currency strategy note.
But he pointed out that some important elements that induced the risk-on, high liquidity environment were still in place.
These are the "miserable" eurozone data that are likely to determine the European Central Bank to ease monetary policy further, falling commodity prices, many central banks around the world cutting interest rates and low inflation in the US which might mean the Federal Reserve's easy money policy could continue.
- Follow us on twitter @emrgingmarkets
03 Jun 2013
