Dollar Doldrums Drive Traders to Emerging-Market Local Bonds

Chances are high that the U.S. dollar will drop even further this year. As a result, local currency emerging-market bonds are seeing a spike in their appeal. 

With reports of bearish wagers on the dollar, experiencing its worst start to a year since 2006, the outlook is not optimistic. Coupled with higher interest rates in developing nations, record inflows to emerging market-funds were rampant during the first half of 2017. 

The tide may shift, however, as returns for local currency securities are more than four percentage points higher, according to Morgan Stanley analysts. 

The chances of a pullback are clearly higher for hard-currency debt, Morgan Stanley analysts led by Simon Waever said in a June 30 note. “In local currency, technicals look more positive, as cumulative flows into local debt have only recovered around half of the outflows seen since 2013.”

Recent selloffs are due to central banks in developed economies signalling monetary policy tightening. Real rates, however, are expected to remain high to justify risk for investors, especially with inflation slowing. 

Read more at Bloomberg.