Wednesday, November 13, 2024

Going Into New Trump Era, Risky Emerging Market Bonds Keep Luring Traders

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(Bloomberg) — Junk-rated dollar debt from developing nations is attracting fresh bets from money managers at UBS Asset Management, Lazard Asset Management Ltd. and PGIM Fixed Income in the wake of Donald Trump’s election.

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The thinking is that improved fundamentals in some emerging nations — growing foreign reserves, funding agreements and structural economic reforms — will help keep these credits insulated from potential selloffs in global rates. They also offer some protection from currency volatility stoked by concerns about Trump’s tariff stance.

Portfolio managers have been riding a rally in high-yield notes for most of 2024. EM hard-currency junk bonds have handed investors a 14% gain year to date, topping a 2.8% return for investment-grade debt, data compiled by Bloomberg show.

Debt from Argentina, Sri Lanka and Pakistan, which has returned at least 23% this year, is poised for more gains, according to Shamaila Khan, head of fixed income for emerging markets and Asia Pacific at UBS Asset Management, which oversees $1.8 trillion.

“Fundamentals are improving and countries emerging out of default will continue to perform,” Khan said. “We may not have another 60%, 70% gain, but you can still see attractive double-digit returns. If you see weakness in the space, it’s a fantastic opportunity.”

The more niche nature of these credits — not all investors can dip into, let alone load up on, junk-rated debt from emerging nations due to liquidity or rating concerns — comes in handy at a shaky time for risk assets.

On Wednesday, the day after Trump secured his return to the White House, dollar notes from Ukraine and El Salvador to Ecuador and Argentina rallied. The gains stood out in a volatile session for markets. A soaring dollar and rising US yields sent an index of emerging-market currencies to its worst day since February 2023. Eastern European currencies spiraled and the Mexican peso sank as much as 3.3% before rebounding.

Investors are still trying to gauge paths for global interest rates and the dollar under a new Trump administration, whose policy promises are largely seen as stoking inflation in the world’s largest economy. Moreover, Trump’s tariffs plans will likely take a disproportionate toll on some of the larger emerging markets, such as Mexico and China.

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