As yields continue widening rapidly, the pace of outflows from emerging market bond funds has picked up, crushing possibilities of dollar-denominated bond issuance for Latin borrowers.
Investors pulled $2.64 billion from emerging market bond funds during the week ended June 19, according to EPFR, up from $2.53 billion of outflows the previous week. They took $3.48 billion from EM equity funds, and LatAm equity funds lost $493 million.
The US Fed said June 19 that it would likely this year begin cutting the $85 billion a month of liquidity it is injecting into markets under its quantitative easing (QE) program.
The announcement pushed bond markets wider as investors adjusted their positions to reflect expected higher rates. The yield on the 10-year US Treasury has continued widening to hit 2.57% Monday, some 24 basis points wider than the day of the Fed’s announcement and 44 basis points wider on the month.
“Overall the environment could be hostile for EM equity and bond funds for some time,” Cameron Brandt, director of research at EPFR, told LatinFinance. “The focus on China's out-of-kilter credit markets, the long wait until the Fed does or doesn't act on tapering QE3 and Europe's numerous unresolved issues mean there will plenty of potential selling triggers well into 2014.”
The uncertainty made finding an entry point difficult for investors wanting pick up fresh paper as prices fell.
“The outflows will continue near term, but dedicated money sees buying opportunities because there is huge relative value,” says a US-based emerging market debt portfolio manager. “If had the money I would buy – if one buys something, a year from now you will be doing well.”
Year to date, EM bonds funds still have $22.4 billion net inflows, EM equity $5.73 billion net inflows and LatAm equity has a net loss of $3.71 billion. LF
Debt, equity funds continue poor performance