Bond Flows’ Wistful Weave
Fund tracker EPFR reported $100 million in net bond inflows at the end of Q1 snapping a long losing streak, with $3.5 billion in hard currency allocation clipping almost the same amount of local currency flight. ETFs were the sole positive category with dedicated US, Europe and Japanese funds shedding exposure, but performance was in stark contrast to equities’ $7.5 billion hole for the period. Pure corporate topped sovereign commitment as the benchmark external indices were up on average 5 percent, half the local bond gauge gain in dollar terms. Additional industrial economy monetary easing and pausing helped drive currency results to a 3-year high as dollar strength eroded. Commodity exporters enjoyed the biggest bounce as oil recovered 50 percent from recent lows. The trade-weighted dollar was down 5 percent as the Chinese renimbi firmed under its new basket peg, and asset class underweight positions drifted toward neutral despite sketchy fundamentals. GDP growth forecasts were again reduced in private and official analysis, and commercial debt overhangs linger in major markets. The Institute for International Finance’s April capital flow survey predicted outflow shrinkage from last year but a still hefty $500 billion retreat. Sovereign ratings downgrades were the worst in a decade with a dozen in the first quarter, as the EMBIG Diversified fell below investment-quality for the first time in five years. Inflation moderated to the 4 percent range but developing country central banks will not loosen monetary policy more than marginally. The index spread compressed 100 basis points in March with $30 billion of gross issuance against a full-year prediction around $100 billion. International corporate placement came to over $45 billion but was one-third off 2015’s pace. Asia continues to dominate, but Latin America crept back with a flotation by Argentine state oil giant YPF amid buoyant post-election sentiment and Gazprom returned as a Russia stalwart despite sanctions.
Heading into the Inter-American Development Bank annual meeting in the Bahamas, regional debt readings were subdued as Moody’s put Mexico on negative outlook with fiscal deterioration from Pemex’s tangled budget and private partner transition. Industrial production and services show opposite patterns for lackluster 2.5 percent GDP growth, as the central bank lifted the policy rate in February to stem peso weakness. Brazil’s unending political saga and recession evoked an impeachment-driven rally as the core PMDB party left the ruling coalition and the Congress begins voting to remove President Rousseff. Improved currency and inflation levels could allow SELIC rate cuts in the coming months and relieve the burden of state obligations to the federal government that will be refinanced under a March proposal. The negligible primary surplus target was further flattened to under 0.1 percent of GDP despite the promise of official spending caps. In the Andean region Colombia’s current account gap will again approach 6 percent of output on lagging oil exports and portfolio inflows. Privatization of electricity generator Isagen should bring in $3 billion but foreign investor enthusiasm remains dented from stalled tax reform and rebel guerilla peace deals. Headline inflation at 7.5 percent is double the target zone. The ELN has just joined the FARC in demobilization talks, and settlement runs the risks of rejection in national voting and heavy immediate fighter compensation and training costs unleashing another sovereign downgrade wave.