US rates outlook, dollar clip emerging market local bond returns: Amundi

A strong dollar and fading U.S. Federal Reserve rate-cut expectations are set to crimp returns for emerging market local fixed income this year, asset manager Amundi said on Wednesday.
 

Amundi had predicted high single-digit returns for both sovereign bonds across emerging markets denominated in local-currency as well as in hard-currency at the start of the year, said Sergei Strigo, co-head of emerging market fixed income at Europe's largest asset manager.
 

"That's obviously a big challenge these days as we have seen a repricing in rates," Strigo said during a media briefing, adding he now expected returns of around 5% in local fixed income.
 

"I have more confidence in the hard currency side." Emerging market local currency debt has lost just over 4% since the start of the year, while hard-currency debt is slightly in the red as well.
 

Performance for high-yield and distressed countries had been particularly eye-catching, said Strigo, with those on the brink either implementing reforms or getting bilateral help, such as Egypt's massive injection of Gulf cash.

"The IMF has been much more active with increasing their financial assistance to a number of countries - all that underpins this ... situation where it's very difficult to see countries blowing up over the next few months or one year going forward," Strigo said.
 

One of the notable reform stories had been Turkey, where Finance Minister Mehmet Simsek and Central Bank Governor Fatih Karahan had delivered "very significant orthodoxy", Strigo said.
 

"We are actually very positive on (the) Turkish lira," he said.
 

On the country's local government bond markets, Strigo said liquidity - which had dried up following years of unorthodox monetary policy - was returning.
 

"It is slowly coming back, but it's still certainly nowhere near where we were two, three or four years ago," he said, adding that he expected the situation to normalise once the interest rate trajectory and inflation path become more clear.
 

"It is not necessarily very easy to take a strong view at this type of level."