Emerging market debt posts 3rd consecutive quarterly gain

Emerging-market bonds posted a third consecutive quarterly advance and Asia’s biggest debt fund predicted further gains as an economic recovery bolsters government finances.

The extra yield investors demand to own developing-nation securities rather than Treasuries shrank to 3.34 percentage points, from a seven-year high of 8.65 points on October 24, according to JPMorgan Chase & Co.’s EMBI+ Index.

The gap, which stood at 4.2 points on June 30, will narrow to 2.85 points in six months, according to Kokusai Asset Management, which manages $61 billion, including the region’s biggest bond fund.

“We expect demand for high-yielders to be supported in the fourth quarter,” said Shigemitsu Tsuruta, an economist in Tokyo at Kokusai. “Emerging-market economies are more resilient after the crisis. We like the domestic-led growth stories in Brazil, Indonesia and Sri Lanka.”

Ratings companies upgraded Brazil, Bolivia, Pakistan, the Philippines and Indonesia this quarter after governments worldwide pumped in some $12 trillion to shore up banks and end the global recession, according to International Monetary Fund estimates.

Gross domestic product in developing nations will rise 4.7 per cent in 2010 from an estimated 1.5 per cent this year, the IMF predicted on July 8. Advanced economies will expand 0.6 per cent after shrinking 3.8 per cent in 2009, it said.

Developing-nation debt returned 9.6 per cent since June 30, slowing from a 10 per cent gain in the second quarter that was the best performance in six years, according to the EMBI+ index. The premium for yields over US Treasuries fell to levels before the collapse of Lehman Brothers Holdings a year ago, which prompted investors to dump riskier investments.

‘Strong inflows’
“This period of crisis has provided investors with further evidence of the positive change in the dynamics of emerging- market economies,” said Ernesto Bettoni, a London-based investment specialist at Fortis Investments, which oversees $231 billion globally. “The momentum remains strong for bonds as we have observed strong inflows.”