Emerging debt prices climbed on Friday, raising monthly returns to a record 3.5 percent, as data showing slower-than-expected US growth supported views that the Federal Reserve will give up raising interest rates in August, sending investors to seek better returns elsewhere.
Emerging market bond returns climbed 0.23 percent on the benchmark J.P. Morgan's EMBI+ index, adding to returns of 2.6 percent in the year-to-date. Bonds posted so far in July their best monthly performance of the year, after a strong sell-off in May and June.
"On the back of the realisation that the Fed may indeed stop its tightening cycle at the current 5-1/4 percent, even the escalating conflict between Israel and Hizbollah and the resulting higher oil prices were shrugged off by the market," TD Securities strategists Beat Siegenthaler and Guillaume Salomon wrote in a research note.
The latest data underpinning a possible Fed pause in August came on Friday, with news that US gross domestic product grew only 2.5 percent in the second quarter, below economists' median forecast of a 3.0 percent rise.
TD Securities analysts added that the recent market recovery shows that the May-June sell-off was a "limited correction rather than a crisis" in emerging markets.
"What made the correction look more severe than it actually was the fact that valuations in the first few months of the year soared to peak levels on the back of massive inflows into emerging markets," they said.
Emerging markets bond funds posted eight consecutive weeks of redemption's during May and June but investors appear ready to come back to the market imminently.
Outflows from such bond flows decreased to a net $89 million in the week through July 26 from $205 million in the previous period, according to Emerging Portfolio Fund Research. Record market gains in recent days will likely attract more investors to emerging market bond funds, said Brad Durham, EPFR's managing director.
Among the strongest performances of the day, Brazil's debt returns climbed 0.36 percent on the EMBI+, with the country's global bond due in 2040, the most liquid emerging market paper, gaining 0.375 point to be bid at 128.438, its highest price since the beginning of May. Brazil's debt continued to benefit from the ongoing government swap of bonds maturing in 2020, 2024, 2027 and 2030 for a global bond due in 2037.
The Brazilian deal follows a raft of bond issues by Latin American countries in the past few days including Colombia, Uruguay and Argentina. After raising $500 million through the reopening of a global bond due in 2022, Uruguay said on Friday it will pay off $900 million in debt owed to the International Monetary Fund in 2007.