Borrowing costs in emerging markets sank to record lows as Japan’s unprecedented monetary easing spurs demand for higher-yielding assets.
The average yield on developing-nation local-currency debt tracked by JPMorgan Chase & Co. has fallen 16 basis points since April 3, the day before the Bank of Japan expanded its asset- purchase program, to an all-time low of 5.39 percent yesterday. Ten-year government yields dropped to levels not seen before in Mexico, the Czech Republic, Poland and South Africa this week, while comparable rates in South Korea and the Philippines touched all-time lows in the past month.
The BOJ said last week it will buy 7.5 trillion yen ($75 billion) of bonds a month and double its monetary base in two years, driving the yen to a four-year low and 10-year yields in Asia’s second-biggest economy to as little as 0.33 percent. Notes due in a decade pay 9.62 percent in Brazil, 7.9 percent in India and 6.78 percent in Russia. The JPMorgan GBI-EM Global Diversified Composite Index has returned 10 percent in yen terms over the past five days, the steepest gain since April 2009.
“With the depreciating yen, funds will continue to flow into emerging markets to take advantage of their higher yields and growth,” said Hideki Hayashi, a specially appointed fellow at the Japan Center for Economic Research in Tokyo. “Demand seems to be quite strong for countries like Turkey and Mexico that have solid economic outlooks.”
Japanese Money
Japanese money managers boosted ownership of Mexican peso- denominated notes by 34 percent to 216 billion yen in the first two months of this year, and Turkish lira debt by 28 percent to 127 billion yen, according to the Investment Trusts Association of Japan. Holdings of South Africa’s rand bonds rose 4.4 percent to 100.2 billion yen, Thai baht-denominated securities increased 17 percent to 22.6 billion yen and Philippine peso notes climbed 5.9 percent to 19 billion yen.
The BOJ has joined global central banks in easing monetary policy to revive growth. The U.S. Federal Reserve is buying $85 billion of government and mortgage debt a month, while the European Central Bank is considering using both standard and non-standard policy tools to stimulate the economy.
“If you combine what the Fed and the BOJ are doing, you are talking about $160 billion a month of reserves being injected into the system,” Steven Englander, a currency strategist at Citigroup Inc. in New York, said in a phone interview. “That’s close to $2 trillion a year. The money has to go somewhere. There’s a despite search out there to get yields.”
Falling Yields
U.S. 10-year Treasury notes yield 1.79 percent, while similar-maturity German bunds yield 1.3 percent.