Macroscope | Emerging-market rally fizzles out
Amid latest sell-off, there are signs of resilience as institutional investors continue asset purchases despite the jitters of retail traders
It began with the frothy market in US junk bonds, the higher-yielding debt issued by low-rated companies that has been one of the most coveted asset classes since the US Federal Reserve launched its ultra-loose monetary policies in 2009.
In the past month, US high-yield debt funds have suffered record outflows, investors withdrawing a whopping US$7 billion last week alone, according to JP Morgan.
Now the nervousness is spreading to emerging markets, which have enjoyed a five-month rally following a sharp sell-off in January.
For the first time in over four months, fund flows to emerging market bond funds turned negative in the week to August 6, with nearly US$655 million in redemptions by retail investors, in particular mutual funds based in the US and Europe.
Foreign investors are still increasing their holdings of local currency bonds in many markets
Over the past month, spreads on US dollar-denominated emerging market bonds over 10-year US Treasuries, as measured by JP Morgan's benchmark emerging market government bond index, have risen 43 basis points, undoing nearly all the tightening since the beginning of this year.
Emerging Europe has borne the brunt of the sell-off - mainly because of concerns about the East-West standoff over Ukraine. Yields on 10-year local currency Russian, Turkish and Hungarian bonds have risen 100, 80 and 75 basis points, respectively, over the past three weeks.