JAKARTA (TheInsiderStories) – Emerging market’s bonds in local currency are considered more attractive after the U.S. Federal Reserve raised the interest rate. Countries with low inflation records, including Indonesia, is unlikely to face pressure due to the U.S monetary tightening.
In fact, the depreciation of the dollar when the Fed raised interest rates could potentially provide additional protection to emerging market (EM) bonds in local currency.
“In a weak dollar period, local EM bonds will benefit from improved exchange rates,” said Manu George, Asia’s senior fixed asset investment director at Schroder Investment Management, Singapore. “The results of local EM bonds could outperform the EM dollar bonds,” he added, as quoted by Bloomberg (23/3).
In debt markets, Indonesia’s local currency bonds are to be added to the Bloomberg Barclays’ Global Aggregate Index, which covers investment grade bonds, from June 1, 2018.
Throughout the year, according to Bloomberg Barclays index, domestic government bonds of developing countries gave yields of 1.9 per cent, continuing last year’s trend of over 14 percent. The dollar bond, including corporate debt, fell 1.9 per cent so far this year.
“I would take advantage of any weaknesses, resulting from the added risk of the EM currency,” said Edwin Gutierrez, head of the EM government bond at Aberdeen Standard Investments, London. His statement refers to concerns about the potential for a war of commerce.
Throughout the year, Bloomberg Spot Index, which measures the performance of the dollar against 10 leading global currencies, has dropped 3.1 per cent, after falling 8.5 per cent by 2017.
Risk appetite for emerging market assets was fairly robust, with MSCI’s benchmark emerging stocks index lifted by strong gains in some Asian markets,
However according to Andr de Silva, EM’s global research head at HSBC Holdings Plc, Hong Kong, the valuation of EM bonds in local currency is still attractive, and the world is far from the possibility of a protracted trade-off. Therefore, he added, do not completely ignore the EM dollar bonds.
“A rise in yields will make good-quality EM dollar bonds attractive, and we tend to add exposure if the results show signs of stabilization,” said George from Schroder.
Written by Elisa Valenta, email: email@example.com