Local Bonds’ Evocative Evolution Story
Although hard-currency fund inflows are well ahead this year on flight to safety and other considerations, local bonds’ asset class future is bright and solid according to JP Morgan’s latest annual guide to 35 markets. Despite volatility stoked by greenback and euro shifts domestic government and corporate issuance dominates the multitrillion-dollar emerging economy debt field and the benchmark index is up double-digits through Q3. Foreign investors hold one-fifth of local instruments at a 4 percent yield premium or 2.5 percent inflation-adjusted over US Treasuries. The long-term appreciation trend based on the IMF’s purchasing power parity and other measures is still in place and capital inflow curbs have recently abated the research notes. Central bank currency intervention has increasingly been on both sides as a stable level is targeted and “macro prudential” steps are directed mostly to banks. EMTA statistics show local-currency at 70 percent of overall trading volume as the outstanding stock is quadruple the external sum at almost $8 trillion. The GBI-EM market size is $1.5 trillion, as predicted gross sovereign placement will top $2 trillion this year, with China representing over half of activity. By comparison developed market issuance will be $4.5 trillion, half from the US followed by Japan. Standard euro area commercial completion outside special programs will drop to $200 billion as emerging Europe demand struggles beyond Poland and Turkey. Among subgroups available inflation linkers mostly from Brazil come to $475 billion and corporates have expanded 20 percent the past two years to $2 trillion, three-quarters concentrated in Asia. Banks have tapped the outlet as syndicated loans have dwindled under deleveraging and regulatory causes to just $100 billion through September. A dozen domestic bond ETFs with $3.5 billion in assets facilitate retail and institutional participation, with pension and insurance pools in developing markets themselves currently at $4.5 trillion.
Insurance company holdings are $1 trillion larger than pensions and the Asian life sector has grown particularly fast in China, India, Korea and Taiwan. European social security schemes with $500 billion in hand have followed Latin America in establishing private defined-contribution pillars. In the latter five countries’ schemes had $650 billion in assets as of end-2011, with $400 billion in fixed-income. Uruguay has seen the most rapid increase and allocation there cannot go into equities. In Chile the AFP portfolios amount to over half of GDP, and the members in Colombia and Mexico are overweight bonds versus their class limits. In the former banks have gone on a borrowing spree at home and abroad helping the peso to lead all currencies with an 8 percent advance to the dollar despite stepped-up buying by the central bank and petroleum wealth fund. The economic growth forecast was recently raised to 4 percent on domestic demand and public investment offering reliable bonds.
