Wall Street’s biggest firms are predicting intensifying bond losses in emerging markets, where borrowing costs have already soared to the highest in more than four years versus U.S. corporate debt, as the Federal Reserve considers curtailing record stimulus.
“We’re not yet convinced that we’ve seen the worst in terms of flows out of emerging markets,” Jeffrey Rosenberg, the chief investment strategist in fixed-income at New York-based BlackRock Inc., the world’s largest asset manager, said in a telephone interview, expressing his own views. “We see a lot of valuation change but we see the potential for even more valuation change.”
Investors have yanked $22.1 billion from emerging-market bond funds since the end of April, almost five times the amount pulled from U.S. corporate credit, according to EPFR Global. That’s pushed the extra yield that buyers now demand to own dollar-denominated emerging-market debt instead of U.S. company notes to 1.4 percentage points, about the most since December 2008.
Borrowing costs are soaring from record lows reached in January as speculation deepens that the Fed will curtail its so- called quantitative easing as soon as this month, signaling an end to the flood of cheap money that propped up asset prices from India to China and Indonesia. The exodus from developing nations began after Fed Chairman Ben S. Bernanke told Congress on May 22 that the central bank could scale back the pace of its $85 billion of purchases of mortgage bonds and Treasuries if the U.S. economy showed sustained improvement.
‘Defensive View’
Emerging-market debt has lost 7.9 percent since the end of April, versus a 5.1 percent decline on U.S. corporates, Bank of America Merrill Lynch index data show. While an expansion in the world’s biggest economy is accelerating, growth in China is projected to slow to 7.5 percent this year from as high as 14.2 percent in 2007, according to 53 economists surveyed by Bloomberg.
“Given the likelihood of further rate volatility and an uncertain emerging-markets growth outlook, we maintain our defensive view” on corporates from developing countries, analysts led by Eric Beinstein in New York at JPMorgan Chase & Co., the world’s largest underwriter of corporate bonds, wrote in a Sept. 5 report.
Default Swaps
Elsewhere in credit markets, the cost of protecting corporate debt from default in the U.S. declined, with the Markit CDX North American Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, decreasing 2.3 basis points to a mid-price of 79.6 basis points as of 11:38 a.m. in New York, according to prices compiled by Bloomberg.
That’s the lowest level on an intraday basis since Aug. 27 for the measure, which typically falls as investor confidence improves and rises as it deteriorates. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.