For the first time since at least 2007 investors are favouring emerging-market dollar bonds over local debt from the same nations as economic slowdowns weigh on the Brazilian real, Indian rupee and Mexican peso.
Funds investing in developing nations' domestic securities took in a net $2.9 billion (Dh10.65 billion) this year through April 18, less than half the $7.3 billion placed in their dollar bonds, according to data compiled by Cambridge, Massachusetts-based research firm EPFR Global.
Over the past five years, inflows to the domestic funds were $6 billion higher on average and the local securities delivered an average annual return of 9.8 per cent in dollar terms, 1 percentage point more than the global bonds.
The shift is a warning sign to Amundi Group and Gramercy that investors are turning bearish on emerging markets, where currencies in Colombia and Hungary gained more than 10 per cent against the dollar this year.
Higher finance costs
Weaker demand for local debt may raise financing costs from Turkey to Indonesia just when China's economy, the world's second-largest, grows at the slowest pace since 2009 and Europe's debt crisis shows signs of worsening.
"There'll be more pressure on local markets and currencies in the near term," said Jeff Grills, who helps oversee more than $2.9 billion of assets at Greenwich, Connecticut-based fund Gramercy.
Local-currency bonds in emerging markets climbed 0.4 per cent this month through Friday in dollar terms, after an 8.3 per cent gain in the first quarter that marked their best start to a year, according to JPMorgan Chase & Co.'s GBI-EM Global Diversified Index.
India's rupee, Brazil's real and Mexico's peso lost at least 2.8 per cent in April. Developing nations' dollar-denominated bonds gained 1.1 per cent since March.
Source: Bloomberg