Emerging-Market Bondholders Recoup Losses From Financial Crisis
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By Michael Patterson and Lester Pimentel
July 17 (Bloomberg) -- Emerging-market bond investors recovered their losses from the worst financial crisis since the Great Depression as a rally in debt from Argentina to Ukraine pushed JPMorgan Chase & Co.’s benchmark index to a record.
The EMBI+ Index, which tracks total returns on the foreign- currency debt of developing nations, has soared 43 percent from its 2008 low to 445.35 today, the highest since the index began in December 1993. JPMorgan’s gauge had dropped to as low as 311.87 in October after mortgage losses at U.S. banks caused global credit markets to freeze and New York-based investment bank Lehman Brothers Holdings Inc. to collapse in September.
“It’s probably the strongest recovery we’ve had in history,” said Nigel Rendell, a senior emerging-market strategist at RBC Capital Markets in London. “The question is if it’s sustainable. I would be much more cautious going forward, because markets just don’t keep going up forever.”
Leaders of the world’s biggest economies pledged more than $1 trillion in April to bolster developing-nation finances by tripling the amount the International Monetary Fund can lend to rescue crisis-stricken countries to $750 billion and promising another $250 billion to shore up foreign-exchange reserves. Bonds issued by Pakistan and Ukraine have led this year’s rally after the countries received IMF financing.
While the index is at a record high, the extra yield investors demand to own emerging-market bonds instead of U.S. Treasuries is 2.56 percentage points wider than its record low on June 1, 2007. The so-called spread today narrowed 9 basis points to 4.05 percentage points.
Indonesia Bond Sale
Indonesia sold 35 billion yen ($374 million) of 10-year samurai bonds today, even after bomb blasts in Jakarta killed eight people, a banker involved in the transaction said. Hungary raised 1 billion euros ($1.4 billion) in its first international sale of bonds since an emergency bailout last year.
Developing-nation bonds have recovered losses faster than global equities and commodities. The MSCI Emerging Markets Index of equities in 22 countries is 42 percent below its peak on October 2007, while the MSCI World Index of 23 developed nations has dropped 41 percent. The Reuters/Jefferies CRB Index of commodities is down 49 percent from its high on July 2, 2008.
The last time emerging-market bondholders suffered losses of at least 30 percent was during the aftermath of Russia’s 1998 default on $40 billion of domestic debt. The EMBI+ Index dropped 36 percent from March through September of that year, and took 15 months to recoup its losses. That compares with a nine-month recovery from the low in October.
‘Massive Mispricing’
“We had a clear panic move in September and October of last year,” said Luis Costa, an emerging-market debt strategist at Commerzbank AG in London. “There was a massive mispricing when the world thought that emerging markets were headed for a series of defaults. As we started to see action from multilateral agencies and governments, money started flowing back into this asset class.”
The MSCI gauge for developing nations added 1.2 percent today to the highest level since June 12. Indian shares rallied on government plans to overhaul the banking and pension fund industries, while Russian stocks gained as OAO Mosenergo said earnings more than doubled in the first quarter.
To contact the reporters on this story: Michael Patterson in London at mpatterson10@bloomberg.net; Lester Pimentel at lpimentel1@bloomberg.net
Last Updated: July 17, 2009 17:39 EDT |
