Author: Gordon Platt



With US treasury bonds offering paltry rates of return, investors are taking a closer look at emerging market debt as a way to pick up an additional 600 basis points or more of yield. EM bond funds posted inflows in the first week of 2009 for the first time since last August, according to Cambridge, Massachusetts-based EPFR Global, which provides flow and asset-allocation data to financial institutions.

The inflow came during a week when the Philippines, Turkey, Brazil and Colombia all returned to the international markets to issue foreign currency debt. Mexico was the first to crack the door open with its $2 billion sale of 10-year bonds in December.

The increased issuance stems in part from the need to finance deficit spending, as well as the need to replenish foreign exchange reserves, says Win Thin, senior currency strategist at Brown Brothers Harriman, based in New York. Many local EM debt markets are simply not big enough to absorb the government’s borrowing needs, he says.

Export earnings for many EM countries have been dwindling with falling commodity prices, while the credit crunch has reduced foreign investment flows, Thin notes. If the global economy improves as the year progresses, borrowing costs for EM nations should ease, he says.

Gordon Platt