Investors pull out of emerging market bonds

By Eric Platt and Joe Rennison/ Financial Times

Investors dumped local currency emerging market bonds last week at the fastest pace since the turmoil at the beginning of the year, while UK stock funds suffered large withdrawals on anxiety over a hard Brexit. Withdrawals from emerging market funds invested in local currency bonds climbed to $727m in the week to October 19, the largest outflow since the third week of the year when investors were rattled by growth concerns in China, according to EPFR.

It is the latest sign that conviction is hardening that both rates and the dollar will rise by year-end as the Federal Reserve debates lifting interest rates against easing by the European Central Bank and Bank of Japan. Yields on developed market sovereign bonds have been rising in recent months, reducing the attraction of higher-yielding emerging market debt. The benchmark 10-year Treasury has risen from 1.36 per cent in July to 1.75 per cent.

“Bond yields globally have been picking up,” said Jorge Mariscal, emerging markets chief investment officer at UBS Wealth Management. “Central banks are signalling that they have run out of ammunition on the monetary policy front and there is also a growing suspicion that inflation is coming back.”

After emerging markets’ positive year, Mr Mariscal said that investors may be taking profits ahead of potential volatility surrounding the US election and the Fed’s meeting to decide on the path of US interest rates.

The rally in oil prices has also eased. Brent crude climbed from $41.80 per barrel in August to $53.14 earlier this month, but has since run out of steam, edging lower to $51.40. “Oil has taken a breather and that is usually negative for emerging markets,” added Mr Mariscal.

UK stock funds came under pressure, shedding $512m in the 12th straight week of outflows. It comes in a week that saw inflation climb to its highest level in nearly two years, with the pound’s brisk decline fanning price increases of gasoline, clothing and food. Investors have in turn dropped long-dated UK Gilts, pushing yields up at the fastest monthly pace since at least 1992.

The benchmark FTSE 100 — comprised primarily of blue-chip companies with large foreign operations — is up nearly 13 per cent this year, but has slid in both dollar and euro terms. The FTSE 250 has dropped 14 per cent in dollar terms.

The redemptions coincided with the largest outflows from US municipal bond funds in more than a year and a deceleration in flows to riskier junk bond portfolios, the EPFR data showed.