Dollar Doldrums Drive Traders to Emerging-Market Local Bonds
- Most 2017 inflows have gone to debt funds in foreign currency
- Higher-yielding local debt attractive as dollar seen weakening
Emerging Markets on Central Bank Watch
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Bets that the U.S. dollar will drop even further this year are boosting the appeal of local currency emerging-market bonds.
Demand for the notes is poised to grow thanks to the combination of bearish wagers on the dollar -- which has posted its worst start to a year since 2006 -- and higher interest rates in developing nations. The yield differential has triggered record inflows to emerging-market funds in the first half of 2017, with most going to notes issued in foreign currency, said Morgan Stanley analysts. The tide may shift as returns for local-currency securities are more than four percentage points higher, according to the bank.