Emerging-Market Bonds May Offer Opportunities

Emerging-Market Bonds May Offer Opportunities

over 3 years ago2 mins

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Target interest rates in emerging economies are also at historic lows – and with many central banks’ bond-buying programs ongoing, adventurous investors may find opportunities abroad… 🧳

What does this mean?

While they haven’t ventured into negative territory just yet, central banks in emerging markets (EMs) responded to the economic shock of coronavirus in a similar way to their more developed cousins, slashing interest rates to encourage more borrowing and spending.

That’s unusual: in the past, crisis-hit EMs have often had to hike rates in order to keep investors from selling the riskier investments they offer and weakening the value of their local currencies – making recovery even harder.

Source: M&G, Bloomberg
Source: M&G, Bloomberg

More unusual still, however, has been EM central banks’ embrace of controversial government bond-buying, a.k.a. quantitative easing. While much smaller than those in, say, the US, the globalized nature of such purchases may signal an increasing confidence among emerging economies – particularly those such as Brazil where bonds are priced in local currencies, rather than the traditional US dollar 💸

Why should I care?

The difference between interest rates in EMs and developed markets creates the potential for attractive returns, according to investment manager M&G. And even if rates do fall further, still-cheaper government borrowing could help fuel stronger economic bouncebacks.

Most EMs engaging in quantitative easing sell (and buy) “investment-grade” bonds; a range of simple exchange-traded funds are available allowing investors to get exposure to several different economies in one fell swoop. Question marks over central bank independence in other countries – like South Africa and Turkey – may give pause for thought, however.

Source: M&G, JPMorgan, IMF, Bloomberg
Source: M&G, JPMorgan, IMF, Bloomberg

And then, as developed economies have proven, there’s the difficulty of kicking the money-printing habit once acquired. If investors lost confidence in EMs’ financial discipline and pulled their cash, the value of local bonds and currencies alike would fall. As with anything, it’s important to keep an eye on emerging developments… 👀

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