The emerging markets fixed income sector has been volatile, with Brazil suffering due to its electio...
The emerging markets fixed income sector has been volatile, with Brazil suffering due to its elections and Russia and the Ukraine remaining positive on the back of strong oil prices.
Asia is getting strong demand from corporate bond investors. The South African market has performed well because its bonds are highly rated.
John Cleary, head of emerging markets fixed income at Invesco, says this asset class has been weak in Brazil because of the political situation. The October elections have caused some volatility in the bond prices. The bond markets have been down 25% in the last month and 18% year to date.
The prospect of increased spending by a leftist government has sparked concern that rising indebtedness may prompt Brazil's government to default on the $337bn it owes. As four-fifths of its borrowings are linked to the dollar or interest rates, currency and bond declines have increased Brazil's total debt threefold since 1995 to as much as 76% of GDP.
Jana Benesova, fund manager at CrÃ©dit Suisse, says in Brazil the country's future financing needs are more demanding than other regions. Liquidity is almost non-existent and the country remains dependent on borrowing. Sovereign bonds are under pressure and the corporate bond market has been beaten to its knees.
According to Benesova, in the current environment liquidity remains key in the emerging bond market. In the Asian region, the sovereign bond free float is relatively limited and corporates have strongly benefited this year.
China has just passed regulation to allow state companies that owe $100m or more overseas to sell corporate bonds denominated in dollars and other foreign currencies to domestic funds and banks.
In Russia and the Ukraine a different story has emerged with the Russian market going up 20% year to date and the Ukraine up 14% in the same time.
Russia has raised 3.177bn roubles by selling two-year bonds at an average of 15.4%. The government plans to sell 165bn roubles of bills and domestic bonds this year.
Cleary says since 1998 Russia has made improvements. The political situation has stabilised and the country has benefited from foreign direct investments from oil companies. Similarly the Ukraine has benefited from strong oil prices, but still has further to go in reforms.
In South Africa the market has been up by 11.7%. Cleary says this is due to the investment-grade ratings on bonds in the country. The government has also announced it will buy back domestic debt and this has added to the surge in the South African bond market.
fund manager comment: MLIM
Our views on the global bond markets are dominated by improving macroeconomic prospects and slow moving central banks. Political instability in the Middle East, weak consumption in Europe and soft global equity markets have led to a decline in expectations of monetary tightening. But we expect to see base rates rise in many countries, albeit at a slow pace. This should be supportive for short-term bonds in the nearer term, but yields are likely to rise sharply when rates start to rise.
Although the current recovery should improve the fiscal situation in Japan, continuing concerns over the health of the domestic financial sector should keep Japanese government bonds in a tight range.
Our view on credit is negative. The lower liquidity in combination with any further reduction in risk appetite among investors could cause a sharp re-pricing of those credits which continue to trade near their tights for the year. Continued scrutiny of accounting practices by the regulators, rating agencies and cautious auditors are likely to lead to further revelations, causing further destabilisation and polarisation away from lower quality names.
Notwithstanding its recent weakness, the US dollar is still nearly 12% above its average for the past decade in trade weighted terms. Among major currencies, the euro has the greatest upside against the dollar on valuation grounds.
The recent weakness in the dollar appears to reflect a downgrading of investors' long-term return expectations for the US relative to the rest of the world. A continuation could lead to a sustained decline in the dollar despite further strong productivity gains for the US relative to other major economies. We remain negative on the yen from a long-term viewpoint due to structural problems in the Japanese economy.
Andres Sanchez is a senior specialist at MLIM fixed income team
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