Tantrum fears fade as riskier EM bonds rise to defy taper talk

Fixed-income securities issued by South Africa, Turkey, Indonesia and India posted the biggest gains among 46 sovereign markets, returning at least 1.2% last month, excluding currency fluctuations

Higher-yielding emerging-market government bonds outperformed their global peers in August, defying the prospects for higher borrowing costs as the Federal Reserve moves toward reducing monetary stimulus.
 

Fixed-income securities issued by South Africa, Turkey, Indonesia and India posted the biggest gains among 46 sovereign markets tracked by Bloomberg, returning at least 1.2% last month, excluding currency fluctuations. An index of global government debt lost 0.5%, while Treasuries fell 0.2%.

Concern about a possible rerun of the 2013 taper tantrum may have been overblown given the resilience shown by high-yielding emerging-market bonds even as Fed Chair Jerome Powell said last week the U.S. central bank could start slowing asset purchases this year. Goldman Sachs Group Inc. sees a smaller reaction in the U.S. bond market than in 2013 as the policy change is being well telegraphed.

“Investors are getting pushed into higher-yielding EM government bonds,” said Eugene Leow, a fixed-income strategist at DBS Group Holdings Ltd. in Singapore. “Developed-market yields stayed persistently low even as Powell guided that the taper is set to start later this year.”
 

A possible decrease in local coronavirus infections may see more inflows in emerging-market debt, which still looks “under-owned,” Leow said.

The generally supportive tone taken by central banks toward lower interest rates has also contributed to positive bond returns, said Gabriel Chan, head of investment services for Hong Kong at BNP Paribas Wealth Management. “It is particularly true for countries with higher rates like South Africa, Turkey and Indonesia,” he said.

South Africa’s central bank at its July meeting softened its stance on raising borrowing costs this year as the country suffers from deadly riots and a third wave of coronavirus infections. Turkish President Recep Tayyip Erdogan ratcheted up pressure on policy makers to cut interest rates last month, while Bank Indonesia kept its benchmark at a record low.