EM bonds big risk: US election

Added 19th September 2016

Axa Investment Managers views a Donald Trump victory in November as the biggest risk for emerging market fixed income.

EM bonds big risk: US election

“I am not saying he can do what he talked about, but it will be very upsetting, especially for Latin America,” Michael Ganske, head of global emerging markets fixed income, said in a briefing last week.

Trump’s objection to the North American Free Trade Agreement (NAFTA) and other free trade pacts such as the Trans-Pacific Partnership (TPP) might hurt emerging markets as trade and globalisation are vital to the EMs, he noted.

Jim Veneau, Asia head of fixed income, pointed out another risk - a surprise rate hike by the Federal Reserve.

Emerging market bonds denominated in hard currency have a relatively low correlation to 10-year US treasury bonds -- about a 30% correlation on average since 2003, according to the firm. To compare, US dollar-denominated EM bonds have about a 77% correlation to both US high yield and global high yield.

However, the figure is for bonds of all durations, he noted.

“Here in Asia, the long duration is highly sensitive to a rate hike. There are segments of the market that will perform very correlated, and might impact the entire market.

“Indonesian dollar credit is five times more volatile than the Chinese credits. We are not concerned about China, but Indonesia always gives a signal,” he said.

Global investors also favour Indonesia in emerging Asia, which is different from Asian investors’ preference for China, he added.

The concern should be on those Asian countries “that have a high percentage of foreign investors who are going to take the money out", Veneau said.

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