Increasing appetite for bonds as global credit markets heal and growing anxiety about a possible dollar slide are tempting US investors back into foreign bond funds for the first time since the market panic of late 2008.
Investors braved riskier assets again in the first half of this year in an accelerating reversal of the mad scramble for safety in havens such as US government bonds after the collapse of Lehman Brothers in September 2008. US investors are showing the biggest appetite for bonds denominated in foreign currencies in nearly a decade, suggesting they are looking to protect themselves against the dollar's potential decline, analysts and fund managers said.
In April, the global bond funds tracked by EPFR Global (Emerging Portfolio Fund Research) and which exclude US bonds saw net inflows of about $4 billion. That's the biggest monthly inflow since EPFR Global started monitoring the flows in mid-2000. In May, net inflows accelerated to $4.7 billion and money continued to pour in June. "Investors' continuing comfort about the need to have fixed income exposure, but also a discomfort with increased dollar exposure may have fuelled some of the return to global bonds, together with the stabilisation of global credit markets," said Brad Durham, managing director of EPFR Global in Boston.
Flows are going into corporate debt, which in areas such as Europe is still viewed as cheap after the battering late last year, and also into government securities. Few expect the global economy to rebound strongly, following the most brutal downturn in decades, and a lacklustre growth environment tends to favour sovereign debt. Yet in the United States, worries are growing that the tide of US government bond issuance, expected to reach $2 trillion this fiscal year alone as the government funds its massive rescue programs, may push Treasuries' prices down sharply.
That concern is making US investors keener on foreign bonds to offset potential losses from dollar-denominated debt. "There is an expectation of an outperformance of non-US government bonds over US government bonds given the expectation the Treasury will have to aggressively increase issuance," Durham said.
MAIN STREET AND DIVERSIFICATION:
Lawrence Glazer, managing partner of Mayflower Advisors in Boston, said his firm has foreign bonds in its portfolios, which offers investors various advantages. "I think Main Street America is now very much concerned about the dollar and is looking for ways to diversify," Glazer said. "Foreign bonds are one way to do that.
"Also if we get future inflation, having money denominated in foreign currencies will be a way to diversify more of that risk," he said. If the dollar falls, that accelerates any inflation pressures in the United States as the price of imported goods rises.
The dollar hit five-month lows against the euro in June and may continue to lose ground, some fund managers expect. "The other reason is that yields in other countries in many cases still look relatively attractive," Glazer added.
EMERGING MARKET PHENOMENON:
In Brazil, for instance, government global bonds are yielding about 2.3 percentage points more than the equivalent US 10-year Treasury note. "The newer phenomenon is money moving into emerging markets," Glazer said.
Bond giant Pacific Investment Management Co, known as Pimco, said on Thursday it launched the Pimco Emerging Markets and Infrastructure Bond Fund in response to an expected rise in spending by developing countries on energy, transportation, water, telecommunications and waste treatment.
The creation of the fund "happens to be somewhat timely given the turnabout in flows," said Christopher Getter, product manager for emerging markets investment solutions with Pimco in Newport Beach, California. In the last two and a half months, there has been a steady stream of inflows into Pimco's emerging market debt funds, he said.
"We have seen increased investor interest in emerging markets, which is really a reversal of the trend that started with Lehman Brothers (collapse) last year when people withdrew wholesale," Getter said.