Outstanding bearish positions on the $3 billion VanEck Morgan EM Local Currency Bond exchange-traded fund fell to 0.69% of the float, the lowest since October 2019, according to data from S3 Partners.
Bearish Bets on EM Local Currency Bonds Shrink | Shorts in the largest ETF tracking emerging-market local debt fall to the lowest level in over four years
A sweet spot remains in Latin America. Brazil’s central bank pushed up its key Selic rate earlier and higher than others, and has already started to ease that policy. Policymakers in Chile, Colombia and Peru have also started trimming rates.
In the coming days, three central banks in the region are expected to deliver cuts. Brazil’s first monetary policy decision of 2024 will likely result in a half-point reduction, while policymakers in Chile and Colombia are also projected to slash benchmark rates.
Even Mexican central bankers, who have kept their rate at a record 11.25% for six decisions, have started signaling eventual cuts. Most analysts expect the next move to be a quarter-point drop in March, according a recent Citigroup Inc. survey.
“Latin America continues to be the most attractive region for local-currency bonds, particularly Brazil and Mexico,” said Carlos de Sousa, a portfolio manager at Vontobel Asset Management AG. Once the Fed starts cutting rates, “that will encourage some of the more hawkish central banks — such as the central bank of Mexico — to also do the same. So they can do pretty well this year.”
Last year, local-currency bonds from emerging markets handed investors a 6.4% return compared with 9.6% for hard-currency debt, according to Bloomberg indexes.
Improving economic conditions and policy changes in countries including Turkey are also luring investors, said Claudia Calich, the head of emerging-market debt at M&G Investments in London, who pointed to a recent embrace of monetary orthodoxy. Turkey’s central bank raised interest rates for an eighth straight month last week and said it would keep them high for as long as needed.
“In local markets, which is an area we hadn’t been invested for quite some time, we finally now added some exposure on back of the central bank’s ongoing tightening,” Calich said.
This article was provided by Bloomberg News.