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Border debt shines as an unlikely haven in a world of rising rates

(Bloomberg) – As the hunt for investments capable of withstanding rising interest rates accelerates, cross-border assets gain popularity against their larger peers in emerging markets. world have posted a 2.6% return this year, keeping pace. with their 2020 performance, as top-ranked emerging market debt fell nearly 2%, offsetting some of the 5.3% gain from last year, according to the JPMorgan Chase & Co. indexes. inflation, bonds of small developing countries attract buyers because their securities tend to be of shorter duration – which means they are less sensitive to expectations of rising interest rates. The average maturity of border market sovereign bonds is six years, compared to 7.9 years for traditional emerging markets, according to the JPMorgan indices. said Leo Hu, who co-manages the $ 7 billion strong emerging market debt fund at NN Investment Partners in Singapore. Border bonds could generate a return of at least 9% over the next 12 months, he said. Growing interest in border assets nonetheless poses a threat to the global economy as central banks return to policy tightening mode. Less developed countries, such as those in Africa, have a higher risk of default than their larger counterparts in emerging markets. And the more funds they attract, the greater the threat of potential contagion if rising borrowing costs hamper economic growth In Africa In terms of geography, fund managers specializing in border assets are almost united in pushing forward Africa, saying the region will benefit the most from rising commodity prices. These include Angola, Ghana and Zambia – although the latter became the first African country during the Covid-19 era to default when it skipped a Eurobond payment last year . the global recovery and the transition to green energies. The metal accounts for nearly 80% of Zambia’s export earnings. The country’s dollar debt has returned 24% this year amid the prospect of an International Monetary Fund bailout, just behind Ecuador among some 75 emerging markets tracked by the Bloomberg Barclays Indices. Angola, Africa’s second-largest oil producer, is another favorite. A drop in crude oil prices last year triggered by the pandemic led the country to seek $ 6.2 billion in aid from its major creditors, allaying fears of a default in one of the worst countries. most indebted on the continent. Angolan bonds have returned 12% this year, according to a Bloomberg Barclays index. African bonds also stand out from their peers in terms of yields. Ghana 2025 securities currently return 6.3%, while Angolan debt of similar maturity returns 6.9%, according to data compiled by Bloomberg. This contrasts with traditional emerging markets. Indonesian 10-year bonds return only 2.3%. Mexican yield of 3.1%. “We have allocated more to border sovereign credits,” said Jens Nystedt, New York fund manager at Emso Asset Management, a specialist in fixed income investments in emerging markets, overseeing $ 6.8 billion. “In particular, we appreciate the prospects for Nigeria, Ghana and Angola, as they would be among the main beneficiaries of the increase in oil prices.” Rescue package Sentiment towards border markets was also boosted this year after the IMF announced a $ 650 billion creation plan. additional reserve assets to help developing economies cope with the pandemic. IMF support has been crucial for Pakistan, which raised $ 2.5 billion in March after resuming a $ 6 billion bailout program. Ecuador’s new government plans to strike a deal with the IMF to ensure financial stability and unlock some of the funds tied to the $ 6.5 billion financing deal reached last year. Bonds from border countries offer returns higher for some reason more chances of default. But many fund managers are not discouraged. “There are quite a few risks, such as a worsening pandemic or too much stimulus, but we are sticking to the rosier scenario for frontier markets,” said Edgardo Sternberg, co-manager for emerging countries. markets Boston debt portfolios at Loomis Sayles & Co., which oversees $ 3.5 billion of developing country bonds. “Frontier markets should continue to outperform,” he said. Central bank meetings in Nigeria, Kenya and Angola will be the focus this week. Elsewhere, policymakers in Indonesia and South Korea will also decide interest rates. Listening: EM Weekly Podcast: Focus on Central Bank Meetings, China DataRates on Hold its economic recovery outweighs concerns about inflation, which remained more than double the bank’s official target in April Monetary authorities in Kenya and Angola are also expected to hold rates on Wednesday and Friday, so that the central banks of Indonesia and South Korea will likely keep rates stable this week. , focus will be on signs of a change of course in the coming months Tuesday, traders will watch to see if the Bank of Indonesia is prioritizing monetary stability over supporting growth in a context of concerns about an acceleration of global inflation and the slow pace of vaccinations in the country. The rupee was Asia’s worst performing currency last week and the country’s sovereign bonds extended their losses on Thursday, the Bank of Korea’s growth and inflation forecasts will be the focus as the central bank puts update its economic projections as Colombia’s central bank meets on Friday. is not a monetary policy meeting, according to Bloomberg Economics Investors will see further impact on the Colombian market as the country faces more credit downgrades, which would consolidate its loss of investment grade status. in April, although the pace may have slowed from March, according to Bloomberg Intelligence. Faster inflation exiting the plant was likely a support as well as strong exports, wrote economists including Chang Shu in a note The onshore yuan remains near its highest level since 2018 against a backdrop of improving the outlook for the Chinese economy, and is poised to become the best. Currency performing in Asia this month after the Indian rupee Chinese debt is also outperforming all its emerging market peers; the benchmark 10-year sovereign yield has fallen nine basis points year-to-date Data on Monday showed Taiwan’s industrial production in April rose 13.6%, while unemployment was stable at around 3.7% The Taiwan dollar has remained resilient in recent weeks, supported by strong demand from the country’s exports, even as a worsening of the Covid-19 epidemic has forced authorities to expand the lockdown to any Island investors will also receive an update on improving the region’s trading sector, with figures for Thailand and Malaysia due on Tuesday and Friday, respectively. Russia’s output and inflation figures will be scrutinized, with the ruble beating most of its peers over the past month on the prospect of further political tightening. Data is released on Tuesday and Wednesday, respectively, Mexico’s annual inflation slowed less than expected in the first two weeks of May while remaining well above the central bank’s target cap Wednesday, traders will be watching the data Q1 gross domestic product finals for any change from last month’s estimate The economy expects the Thursday release of the minutes from the last central bank meeting to reflect a less conciliatory tone. Brazilian CPI consumer price inflation data for May, expected on Tuesday, will likely see a rise amid rising electricity prices, according to Bloomberg Economics. the account figures for April on Wednesday for signs that a strong trade surplus has boosted the balance. Unemployment figures the next day may reflect increased restrictions in March, as infections soar. (Updates Taiwan’s production figure in the data section.) More stories like this are available at bloomberg.com LP


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