The following is an excerpt from RESHMA KAPADIA | September 1, 2012 | Barrons.com |
There are few places investors won’t look in their search for yield and safety, and emerging-market bonds are the latest focus, attracting record inflows. But all that money has driven prices up and yields down, making investing tougher. It is time for a more nuanced approach.
Emerging-market debt has come a long way from the currency crises of the 1990s, which forced countries to be much more fiscally responsible. The average debt-to-GDP ratio (a measure of a nation’s economic health) for the developed world hovers around 100%; Japan is an outlier at 200%. Emerging markets, however, have a debt-to-GDP ratio of just 34%. Lower ratios mean an increased ability to repay debts.
As a result, “emerging market” is no longer akin to “junk,” and these countries are seeing their credit ratings upgraded. At the same time, developed markets (most notably, ahem, the U.S.) are getting downgraded. Nearly two-thirds of the JPMorgan Emerging Markets Bond Index Global Diversified is now investment-grade.
All this good news isn’t lost on investors, who have poured $13 billion into emerging-market bond funds this year, on top of $14 billion last year, according to Lipper. Small wonder, when you look at the average 5.6% yield of these funds, and the index’s 13% gain this year.
SOUND TOO GOOD TO BE TRUE? Maybe it is. Despite their strong performance and relative resilience, emerging-market bonds aren’t a safe haven, and money managers are becoming more cautious. Most of the recent investment has gone into dollar-denominated sovereign bonds, and fund managers say that finding opportunities there is becoming harder.
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