Borrowing costs in emerging markets sank to record lows as Japan’s unprecedented monetary easing spurs demand for higher-yielding assets.
The average yield on developing-nation local-currency debt tracked by JPMorgan Chase & Co. has fallen 16 basis points since April 3, the day before the Bank of Japan expanded its asset- purchase program, to an all-time low of 5.39 percent yesterday. Ten-year government yields dropped to levels not seen before in Mexico, the Czech Republic, Poland and South Africa this week, while comparable rates in South Korea and the Philippines touched all-time lows in the past month.
The BOJ said last week it will buy 7.5 trillion yen ($75 billion) of bonds a month and double its monetary base in two years, driving the yen to a four-year low and 10-year yields in Asia’s second-biggest economy to as little as 0.33 percent. Notes due in a decade pay 9.62 percent in Brazil, 7.9 percent in India and 6.78 percent in Russia. The JPMorgan GBI-EM Global Diversified Composite Index has returned 10 percent in yen terms over the past five days, the steepest gain since April 2009.
“With the depreciating yen, funds will continue to flow into emerging markets to take advantage of their higher yields and growth,” said Hideki Hayashi, a specially appointed fellow at the Japan Center for Economic Research in Tokyo. “Demand seems to be quite strong for countries like Turkey and Mexico that have solid economic outlooks.”
Japanese money managers boosted ownership of Mexican peso- denominated notes by 34 percent to 216 billion yen in the first two months of this year, and Turkish lira debt by 28 percent to 127 billion yen, according to the Investment Trusts Association of Japan. Holdings of South Africa’s rand bonds rose 4.4 percent to 100.2 billion yen, Thai baht-denominated securities increased 17 percent to 22.6 billion yen and Philippine peso notes climbed 5.9 percent to 19 billion yen.
The BOJ has joined global central banks in easing monetary policy to revive growth. The U.S. Federal Reserve is buying $85 billion of government and mortgage debt a month, while the European Central Bank is considering using both standard and non-standard policy tools to stimulate the economy.
“If you combine what the Fed and the BOJ are doing, you are talking about $160 billion a month of reserves being injected into the system,” Steven Englander, a currency strategist at Citigroup Inc. in New York, said in a phone interview. “That’s close to $2 trillion a year. The money has to go somewhere. There’s a desperate search out there to get yields.”
U.S. 10-year Treasury notes yield 1.79 percent, while similar-maturity German bunds yield 1.3 percent.
The yield on South Africa’s 7.75 percent debt due February 2023 dropped 12 basis points, or 0.12 percentage point, this week to 6.52 percent, while that for Mexico’s 6.5 percent notes maturing in June 2022 fell 11 basis points to 4.68 percent, according to data compiled by Bloomberg.
The Philippine 10-year yield reached 3.29 percent April 1, the least since Bloomberg began tracking the data in 1998, and was steady today at 3.53 percent. South Korea’s five-year notes hit an all-time low of 2.51 percent March 28 and jumped 20 basis points today to 2.78 percent, the biggest increase since May 2009, after the central bank refrained from cutting its benchmark interest rate.
The Japanese currency has weakened against all 25 emerging- market counterparts tracked by Bloomberg this year and touched 99.88 per dollar yesterday, the lowest level since April 2009. It traded at 99.68 at 5:12 p.m. in New York.
Depreciation boosts returns on overseas investments for yen-based investors. The yen has plunged 21 percent against the dollar in the past six months, the most among 32 major currencies tracked by Bloomberg.
Yen-based investors will earn 12 percent on Argentine peso assets including interest income by the end of this year, 7.3 percent from India’s rupee and 7.2 percent from those denominated in South Korea’s won, based on the median estimates of analysts surveyed by Bloomberg. Iceland’s krona led gains among 25 emerging-market currencies with a 24 percent advance against the yen, followed by the Mexican peso at 22 percent, the Thai baht’s 21 percent and the Brazilian real’s 19 percent.
Investors now demand a premium of 282 basis points to hold emerging-market sovereign bonds instead of U.S. Treasuries, down from 355 basis points a year ago, JPMorgan data show.
“Funds are flowing into emerging markets as Japan steps up loosening,” Kenix Lai, a Hong Kong-based foreign-exchange analyst at Bank of East Asia Ltd., said by phone today. “Japanese bond yields are so low that some of the funds might leave Japan for higher-yielding assets, and emerging markets are the top choices” for them, he said.
Asian emerging-market bonds that are perceived to be less risky than those of some of the largest developing nations will attract more global investments, according to Western Asset Management, which oversaw $462 billion of assets as of Dec. 31.
Five-year credit-default swaps protecting sovereign debt cost 94 basis points yesterday for Thailand, 82 for South Korea and 100 for the Philippines, according to data provider CMA, which is owned by McGraw-Hill Cos. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements. Similar contracts are at 117 basis points for Brazil and 154 for South Africa.
Developing Asia will expand 7.1 percent in 2013, compared with 2.4 percent growth in central and eastern Europe and 3.6 percent in Latin America, the International Monetary Fund estimated in January. Japan’s gross domestic product may rise 1.2 percent this year, according to the IMF.
“Asian bonds now offer a high-quality investment alternative that wasn’t available a decade ago,” Chia-liang Lian, Singapore-based head of investment management for Asia excluding Japan at Western Asset, said in Hong Kong yesterday. “Sustained flows into Asia and other emerging-market debt can co-exist with the upswing in general market sentiment.”
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