Record pace of emerging market debt

In this series so far, we’ve talked about the run up in emerging market equities and some currencies in YTD 2017. Along with the two, investors have been lapping up emerging market bonds as well.

The Wall Street Journal quoted data from Dealogic, which showed that governments and corporations from emerging markets sold a combined $179 billion in bonds in Q1 2017. This is twice the amount of bonds sold from a year ago and is the most emerging market debt ever sold in the first quarter.

According to data from EPFR Global, which showed that in the week to March 22 alone, emerging market bond funds attracted inflows amounting to $2.7 billion – the highest in one week since July 2016.

ETF inflows remain strong too

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ETFs listed on US exchanges and investing in emerging market bonds have witnessed inflows to the tune of $3.4 billion in YTD 2017. Of this, net inflows amounting to $2.1 billion have flowed into the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) alone. This is higher than inflows into broad-based fixed income ETFs like the iShares Core U.S. Aggregate Bond ETF (AGG) and the Vanguard Total Bond Market ETF (BND) which invest across the US bonds universe.

ETFs investing in corporate bonds have grossed the highest net inflows in the US so far with the iShares iBoxx Investment Grade Corporate Bond ETF (LQD) and the Vanguard Intermediate-Term Corporate Bond ETF (VCIT) attracting over $3 billion each.

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Reasons for the demand

One of the reasons why emerging market bonds have become popular with investors, especially lately, is that the US administration has toned down its rhetoric on trade protectionism since it took over on January 20, 2017. The issue was one of the biggest reasons for the sell-off seen in emerging market assets post President Trump’s victory last November.

Another major reason for investors choosing to invest in emerging market debt is because of the relatively strong fundamentals. The wide-range of emerging markets provides lots of choices. Further, in terms of economic structure itself, emerging markets of today are different from those of a decade ago.

The decision by the US Federal Reserve to maintain a benign pace of rate hikes in the US, instead of an aggressive stance as was feared, has also boosted demand for these instruments.

Historically, investors have found emerging market bonds attractive because of the higher yield that they offer compared to bonds in developed economies. But this time, it may not necessarily be the case. Let’s look at this argument in the next article.

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