Investors pull money out of EM bond funds; Fed decision hits Czech Republic, Croatia

By Christine Van Dusen

Atlanta, Dec. 20 - Emerging markets bond funds saw investors yank out $2.2 billion by the end of a quieter, pre-holiday week that focused primarily on the U.S. Federal Reserve's decision to begin tapering its bond-buying program.

Though the tapering news - along with word that rates will remain low for longer - may have been largely greeted with a yawn this week, local-currency bond markets in Czech Republic and Croatia felt a change, according to a report from Erste Group Research.

"Volatility is back, and with it a resurgence of new relative value plays in Central and emerging Europe fixed income," the report said. "It is not only Turkey, the most obvious candidate to get impacted negatively by the
taper."

The Fed's decision may or may not have had a direct impact on the outflows from emerging markets bond funds.

"In many cases, the bulk of the redemptions occurred before the Fed's decision," said Cameron Brandt, EPFR's global research director. "So it's not clear yet if it was uncertainty about the decision, or the decision itself, that drove the outflows."

EM bond funds have seen outflows of $12.4 billion for the year, which market sources say is particularly bad performance.

Also on the market's mind on Friday was Ukraine, which continues to experience political turmoil as protestors demand the president's ouster and seek to amend the constitution and create a parliamentary republic.

In response, the sovereign's bonds went into the end of the week "slightly off, mostly at the long end, on some profit-taking and the U.S. Treasury moving higher," said Svitlana Rusakova of Dragon Capital.

"Corporates were continuously better bid with not much in terms of supply," she said.

Russian bonds avoid big drop

Meanwhile, bonds from Russia remained under some pressure but didn't face a significant decline after Thursday's Treasury yield moves, according to a report from UFS Investment Co.

Yields on sovereign bonds have increased so far this week.

"Significant correction in the morning was not observed," the Friday report said. "A number of positive factors will keep the Russian eurobonds from considerable decline."

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