Author: Gordon Platt

Year-End Rebalancing May Aid Bond Funds

By Gordon Platt

Emerging market bonds could attract significant inflows from fund managers in the year-end period, as money is redirected from safe but low-yielding investments into riskier assets, assuming that the global economic recovery continues, according to Morgan Stanley.

Emerging market bond funds experienced modest outflows in early November as risk appetite diminished on fears that central banks around the world would begin seeking an exit strategy from overly accommodative monetary policies that have flooded global markets with liquidity. At their November meetings, however, the major central banks of the US and Europe gave no indication they were close to raising rates.

“The end of the year is traditionally favorable for fund inflows as strategic mandates are made,” Morgan Stanley’s London-based fixed-income strategists Rashique Rahman and Regis Chatellier said in a report. “Bouts of weakness, such as the one just experienced, are to be expected and should be bought into, with a view to further asset price gains into early next year.”

A total of $1 million flowed out of emerging market bond funds in the week ended November 4, following inflows for the seven preceding weeks, according to Cambridge, Massachusetts-based EPFR Global. Global fund managers will need to add exposure to emerging market bonds in the weeks ahead to be in line with their benchmarks, according to Morgan Stanley. Abundant global liquidity will increasingly flow to higher-yielding asset markets, it says.