EM hard-currency bond funds see second straight weekly inflow: EPFR

By Rebecca Melvin

New York, July 20 – Emerging markets bond funds were able to string together two consecutive weekly inflows for the first time since mid-April as yield-seeking investors take another look at an asset class that has become pretty cheap, according to fund flows and asset allocation data tracker EPFR Global.

Investors put more than $599 million into EM bond funds for the week ended July 18, with $787 million flowing into hard-currency funds and with $131 million coming out of local-currency funds, EPFR reported.

Flows favored those hard-currency bond funds that offered diversified exposure and duration and credit quality. At the regional level, investors with a corporate focus gravitated to Latin America corporate bond funds while the Emerging Europe, Middle East and Africa was the preferred region for sovereign debt investors.

At the country level, a growing number of defaults triggered by tighter credit standards did not stop China bond funds from attracting fresh money for the 13th time in the past 16 weeks.

There is no one thing that has caused the tide to change for EM, EPFR’s Cameron Brandt told Prospect News. But a tipping point in cheapness, particularly if investors are buying in euro or yen, together with the pickup in U.S. inflation muddying the rates picture seem to have sparked the inflows.

Also “U.S. assets as a safe haven mean that they are richly valued at the moment, and U.S. Treasury yields have stayed in a surprisingly narrow range,” Brandt said.

Meanwhile fears about geopolitical risk have been put on the back burner. “The market has learned that in the post great-financial-crisis world sometimes it’s best to set geopolitical filters at a high level,” Brandt said, adding that in the last few years, “nobody is patting themselves on the back for getting out ahead of some geopolitical risk.”

Where Brandt sees the greatest risk currently is not China, but the European Union, with Italy, Greece, looming Brexit, and a stalled reform story in France all candidates for possible pressure brought to bear on the region after the summer lull.

© 2015 Prospect News.
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