Bonds Are Emerging Markets’ January Winners as Virus Hits Stocks

LAGOS (Capital Markets in  Africa): While emerging-market stocks and currencies are set to close January on a low note amid mounting concerns about the spread of the deadly coronavirus, bonds have become the go-to asset as investors begin to price in the prospect of lower interest rates to stimulate growth.

The average yield on developing-nation local-currency bonds dropped 11 basis points in January to an all-time low of 4%, handing investors a total return of 0.5%. Hard-currency debt performed even better with a return of 1.4%. That may not sound like much, but stocks are down 3.6%, while an index of emerging currencies shed 1%.

With the death toll from the coronavirus rising to 170, investors are cautious ahead of a meeting of the World Health Organization’s Emergency Committee later Thursday. Following Wednesday’s Federal Reserve gathering, where he and his colleagues kept policy on hold, Chairman Jerome Powell said the virus will likely hit the Chinese economy and spill wider, though it was too early to assess its impact on the U.S.

Sovereign Spread
The average premium investors demand to hold emerging-market sovereign dollar debt rather than the U.S. Treasuries rose 21 basis points in January.

“In hard currency credit, the spread-widening is being compensated by the falling underlying rate yields,” said Trieu Pham, a London-based emerging-market sovereign debt strategist at ING Groep NV. “In local-currency credit, the prospect of a lower-inflation and lower-rates environment has seen yields falling as well.”

While weakening currencies may weigh on emerging-market bond returns, the rally in Treasuries and other advanced-economy debt may continue to fuel demand for the securities, according to Amundi SA, Europe’s biggest asset manager, which oversees 1.45 trillion euros ($1.6 trillion).

“There will be some negative impact from weakening currencies, especially on countries with fiscal problems such as South Africa, but this will be partly offset by the downward pressure on global yields,” said Pascal Blanque, the Paris-based chief investment officer at Amundi. “Hard currency bonds will be less impacted as the negative impact on spreads is likely to be largely offset by lower moves in core yields, for example, U.S. Treasuries.”

Source: Bloomberg Business News