Emerging-Market Debt Is Expected to Stabilize
By: Angela Pruitt
Dow Jones Newswires
Monday April 1, 10:01 pm Eastern Time
NEW YORK -- After racing higher during the first quarter, emerging-markets debt is likely to remain steadier in the next few months, analysts say.
This year, U.S. corporate bonds lost luster because of the problems of high- profile companies such as Enron Corp. Investors shifted money to bellwether emerging-markets nations such as Brazil , Russia and Mexico .
Fund inflows helped propel the benchmark J.P. Morgan (NYSE: JPM - news) Emerging Markets Bond Index Plus upward by some 6.5%.
But most emerging-markets debt issues are approaching fair value, and it is unlikely that overall returns will stay as high, some in the market say. Although "cautiously optimistic" about the sector in the second quarter, David Rolley, a fund manager at Loomis Sayles & Co ., said he isn't looking for the returns seen in the first quarter.
Already, there are signs the rally might be petering out. J.P. Morgan said a survey indicated that clients over the past month have lightened exposures to the emerging markets while increasing cash positions.
"It's unclear whether most emerging markets will continue to receive exceptional flows, given that so many credits are at expensive levels relative to U.S. corporate [bonds]," said Lenora Suki, a debt strategist in the New York office of Spain 's Santander Central Hispano. Coupon and amortization payments will represent the major component of total returns this quarter, and probably more so than price appreciation, she said.
Latin American politics, the trajectory of U.S. interest rates and Argentina 's continuing financial crisis will dominate the market's attention, analysts and investors say. Most of the focus will center on Brazil , as investors keep close tabs on the country's presidential race this year. "If Brazil goes well, so will the asset class," said Mark Dow, a portfolio manager at MFS Investment.
With Mexico 's bonds viewed as expensive, given the country's investment-grade status, Brazil is now the most widely followed emerging-markets nation in Latin America, as well as the country most heavily weighted in key indices.
Thomas Trebat, an economist at Salomon Smith Barney, said that in the second quarter, there should be more clarity on how Brazil 's presidential race will take shape. If a viable pro-market candidate took the lead, returns could be affected more broadly, he said.
Meanwhile, Argentina appears to face formidable problems, as its government seeks International Monetary Fund aid. Unable to grow out of a recession that has dragged on since mid-1998, Argentina in December defaulted on $141 billion in public-sector debt. But "if there were a meeting of the minds" on resolving Argentina 's financial crisis, that could provide a boost to emerging-markets debt, Mr. Rolley said.
Among other Latin nations, the markets will also be keeping a close eye on the politically charged environment in Venezuela , where President Hugo Chávez faces an eroding power base.
Treasurys
Treasurys ended lower on signs of strength in the manufacturing sector and on gains in oil prices.
U.S. bond markets were closed Friday for the Good Friday holiday. At 4 p.m. , the benchmark 10-year Treasury note was down 8/32 point from last Thursday, or $ 2.50 per $1,000 face value, at 95 26/32. Its yield rose to 5.428% from 5.393% Thursday, as yields move inversely to prices.
The 30-year Treasury bond's price was down 13/32 point at 93 23/32 to yield 5.827%, up from 5.796% Thursday.
Price action was quiet throughout the session, as traders started the first day of a new calendar quarter.
Losses were modest, and some traders said they would have been larger if not for a slide in equities prices that gave Treasurys some attraction. The Dow Jones Industrial Average ended 41.24 points lower at 10362.70.
Most of the decline in Treasurys came after release of the monthly Institute for Supply Management purchasing-management index, which rose to 55.6 in March from 54.7 in February and 49.9 in January. Above 50 suggests an expansion of activity.
The report helped keep traders focused on the reality that the economy is emerging from recession, and that higher interest rates lie ahead in coming months.
-- Michael S. Derby contributed to this article.
Write to Angela Pruitt at angela.pruitt@dowjones.com |
