Currency weakness serves as a double dose of good news for domestic corporate bonds -- evident in spreads that have tightened to near-record lows.
First, foreign buyers are showing an increased appetite for the asset class -- which had recently been dominated by domestic investors -- as American corporate debt goes on sale.
And the unexpected boon to commodities has offered relief for what had recently been the sick man of the corporate debt world -- energy bonds.
Emerging Markets
Nowhere has the dollar’s weakness been met with more investor enthusiasm than in emerging markets. Five straight monthly drops for the greenback have led to an equal streak of gains in developed-nation stocks, pushing MSCI Inc.’s measure to the highest since 2014. It wasn’t meant to be that way, of course, with Trump’s America First agenda expected to promote protectionism that would roil emerging markets.
Instead, government debt from South Africa to Brazil has also enjoyed a strong run, since a falling greenback means lower costs to service any bonds denominated in dollars -- though the benefit has been lessened since the mid-1990s as governments hedge the exposure.
“A weaker dollar means easier financing conditions, especially for EMs, who are effectively short the dollar,” Pearkes said.
It’s also expected to contribute to the next leg of the emerging bond rally by giving some central banks more room to ease policy.
“A weaker dollar -- and therefore stronger local currencies -- has helped provide a cap to local inflation. That has kept inflation expectations low locally, which has been supportive for bond prices,” said Mike Moran, head of economic research for the Americas at Standard Chartered Plc.
This article was provided by Bloomberg News.