Emerging sovereign dollar bonds enjoy fresh U.S. election shine

LONDON, Nov 4 (Reuters) – Emerging market hard-currency bonds tallied up healthy gains on Wednesday after a sharp drop in U.S. Treasury yields reinvigorated the hunt for yield and soothed market jitters across some of the developing world over the U.S. elections.

Longer-dated dollar-denominated bonds issued by higher-rated sovereigns from Mexico to Peru and Qatar to Indonesia rose as much as 4.5 cents, with many hitting multiweek highs. The move came as U.S. Treasury yields retreated after an unexpectedly close U.S. presidential election raised concerns of prolonged uncertainty and cast doubt over a much-needed spending package.

“For the hard currency universe in emerging markets, a bit lower U.S. yields and more stability on the U.S. yield curve and a dovish Fed will keep very strongly the search-for-yield theme alive,” said Valentijn van Nieuwenhuijzen, chief investment officer at NN Investment Partners.

“That would certainly remain very supportive for hard currency debt in emerging markets and higher yielding fixed income more broadly,” he said.

The gains in emerging hard-currency bonds come against an unsteady performance across many of developing market assets with currencies pinballing against a fading dollar while emerging market stocks tallied on Wall Street gains.

JPMorgan reiterated its overweight stance on emerging market hard currency debt while reducing its exposure in other parts of the developing world, such as foreign exchange markets in Latin America.

“A Democratic majority in the Senate looks less likely now, meaning the ‘Blue Wave’ scenario should be priced out of EM markets,” JPMorgan’s Jonny Goulden wrote in a note to clients.

“This will benefit EM bond markets, particularly the lower yielding ones.”

The spread of JPMorgan’s EMBI Global Diversified emerging bond index has more than halved year-to-date for investment grade rated bonds, while high-yield ones have come in by just over a third.

Emerging debt markets have enjoyed healthy inflows already in recent weeks and investment grade debt has outperformed developing hard-currency debt more broadly.

Research from BofA showed emerging debt funds attracted $1.6 billion in portfolio flows in the week to last Wednesday in a fourth week of inflows. Issuance also reflected investor appetite with a deluge of emerging market hard-currency bond sales hitting markets in the past two months as governments and companies rushed to the market in the run-up to the U.S. elections.

But not everyone is sure how long the rally can be sustained, with the twist and turns in the U.S. election outcome leaving many questions still unanswered.

“Most investors will be waiting on the sidelines – there are just too many question marks,” said Sergey Dergachev at Union Investment.

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