Emerging market bonds are seeing huge outflows in recent weeks as Wall Street firms turn against the securities in the face of change in the United States. The expected change in the Federal Reserve quantitative easing program has already caused problems in emerging markets, but the worst may be to come, according to analysts.
Bloomberg looked at emerging market sentiment among big Wall Street firms in a piece today, and the news wasn’t all that good for investors in emerging markets. BlackRock Inc. (NYSE:BLX)’s head of fixed income Jeffrey Rosenberg told the outlet, “We’re not yet convinced that we’ve seen the worst in terms of flows out of emerging markets.”
Losses on the way
According to the piece, more than $22 billion has been removed from emerging market bond funds since April. There are several problems in the market, but most come back to the same source. The Federal Reserve is likely to end its cheap money focus in the coming months, and that is going to have ramifications across the global economy.
The quantitative easing program suppressed returns on bonds in the United States and left fixed income investors looking elsewhere for yield. That search naturally led to emerging market bonds. As investors expect a change in Federal Reserve policy and yield rises back home, they’re pulling their money out of emerging markets.
According to Bloomberg, emerging market debt has lost close to 8 percent since the start of April, while U.S. Corporate debt has lost just over 5 percent. Country specific problems in places like China, Brazil and India have made investors even more wary of investing in debt across the world.
Emerging Market opportunities are still out there
It is important to note that emerging market bonds are not dead, they’re just less interesting in the face of instability and better yield at home. There are still opportunities for investors in emerging markets, and fixed income investors are finding opportunity in some countries.
According to a report from Societe Generale, most of the countries in Latin America have actually seen net investor inflows in recent months. The lesson from that report is that investors should not think of emerging market debt as a single homogenous entity. There are opportunities, but investors will have to take time to find them.