NEW YORK - Encouraged by the higher commodity prices and international bailouts Argentina and Ukraine carry emerging market bonds to the top. The average yield spread on emerging market dollar bonds has narrowed 84 basis points this month to 4.46 percentage points, according to JPMorgan
Bonds sold by developing countries returned 3.4 percent in May, extending their gain since March 1 to 12 percent, according to Merrill Lynch & Co. indexes. That marks the best performance since October to December 2002, when concern eased that Brazil would default after the election of President Luiz Inacio Lula da Silva. Argentine debt climbed 28 percent this month while Ukraine gained 17 percent, the indexes show.
"We’re seeing a lot of money come into the market," said Pablo Cisilino, who manages $10 billion in emerging-market debt at Stone Harbor Asset Management in New York.
Investors snapped up debt in May from raw-material exporting nations such as Brazil, Russia and Indonesia as signs the global recession may be easing helped lift the UBS Bloomberg Constant Maturity Commodity Index 13.1 percent, the most since February 2008. Any indication of a slower economic rebound may hurt emerging-market debt, Cisilino said. Data on durable-goods orders and unemployment Thursday offered no sign of an imminent rebound from the worst U.S. recession in half a century.
"We may have a pullback in the summer," Cisilino said. "A lot depends on what happens to the global economy." Argentina reduced default concerns after extending maturities on 15.1 billion pesos ($4.3 billion) of debt this year. Emerging-market investors are "most bullish" on that country’s bonds, according to a survey by Barclays published this week. 1
Ukraine’s financing improved after the country won approval for the second part of a $16.5 billion International Monetary Fund loan. JPMorgan Chase & Co. upgraded Ukraine’s bonds to "marketweight" from "underweight" on May 19, citing the IMF’s support.
The extra yield investors demand to own Argentine bonds instead of U.S. Treasuries has shrunk 4.6 percentage points in May to 13.06 percentage points, the smallest gap since October, according to JPMorgan Chase & Co.
The rally in Ukraine’s dollar bonds pushed yields down by 5.2 percentage points this month to 11.50 percentage points, according to JPMorgan. That’s the smallest gap since October.
Emerging-market bonds’ three-month rally since February compares with a 13 percent rise in the three months ended in December 2002, just after Lula’s election to a first term, Merrill indexes show.
The average yield spread on emerging-market dollar bonds has narrowed 84 basis points this month to 4.46 percentage points, according to JPMorgan’s EMBI+ Index. A basis point equals 0.01 percentage point. The so-called spread has tumbled from a six-year high of 8.65 percentage points in October.
Emerging-market bonds slumped Thursday after reports showed durable-goods orders in the U.S. hovered near a 13-year low in April and the number of Americans collecting unemployment insurance reached a record. The spread widened 13 basis points from 4.52 percentage points.
A retreat in global stock markets may also spark declines in emerging-market bonds, according to Prudential Financial Inc. The MSCI Emerging Markets Index rallied 53 percent since Feb. 27, the best three-month performance since its inception in December 1987. The 23-country measure now trades at 14.7 times reported earnings, the priciest since January 2008.
Emerging-market stocks are "technically overbought" after 12 straight weeks of fund inflows drove the benchmark index above its 200-day moving average, analysts led by Jonathan Garner at Morgan Stanley wrote in a report dated Thursday. Bank of America-Merrill Lynch and Morgan Stanley are predicting a sell-off in developing-nation stocks after inflows into emerging-market funds climbed to levels that foreshadowed previous retreats.
"Stocks have come a long way awfully quick," said David Bessey, who manages $8 billion of emerging-market debt for Prudential Financial in Newark, New Jersey. "Can’t rule out the potential for a pullback there. If that happens, spreads in emerging markets might sell off as well. The correlation between risk markets has been pretty high."