EM bond funds saw record net monthly inflows of €8.4bn during a month that also saw European equity fund outflows at an all-time high. A large spectrum of emerging market bonds is in fashion at the moment: almost all categories, from short-duration hard currency to local currency government bonds, saw net inflows at levels previously unseen. Chinese bonds were the exception, recording net outflows over the month.
For Thomas Romig, who runs a multi-asset fund from Frankfurt at Assenagon, emerging market debt now looks so attractive to developed market fixed income that he made a very bold move.The renewed popularity of emerging market debt can be viewed in the light of the ever more challenging search for yield. Yields on emerging market bonds are significantly higher than their equivalents in developed markets, as you can see on the adjacent graph.
“I have an allocation of 15 to 20% to emerging market debt at the moment, which is indeed my highest ever,” he says. Because of his unusually high overweight to emerging market debt, Romig is now underweight European credit.
This naturally means that the German is accepting higher volatility in exchange for more yield. This is a trade-off not all investors are prepared to make, since investment-grade corporate bonds have continued to see net monthly inflows in excess of €1.7bn for each of the past five months.
Investors instead seem to funnel money from their European equity holdings to emerging markets instead. The inverse relationship between European equity and emerging market equity (and debt) when it comes to fund flows, as well as investment sentiment, has been observed before. It is especially apparent in periods when investment sentiment is changing, as is the case now.