Emerging-market investors piling into Treasuries


  • Markets
  • Friday, 06 Mar 2020

With markets across the world reeling from the spread of the coronavirus, traders are being forced to come up with new ways of hedging their risks.

DUBAI: US Treasuries are the polar opposite of what emerging-market (EM) investors should be buying.

But for some money managers who typically only focus on high-risk developing nations, they’ve become the asset of choice as they try to preserve capital.

With markets across the world reeling from the spread of the coronavirus, traders are being forced to come up with new ways of hedging their risks.

Among those who have turned to US government bonds are Alejandro Arevalo, who runs funds focused on EMs for Jupiter Asset Management Ltd, and Paul McNamara, who oversees more than US$7bil of developing-market fixed-income assets for GAM Investment Management.

“Investors pay us to buy EMs, but in this case, you have to think outside the box, ” Arevalo said, adding that he’s never held so many Treasuries.

“It’s simply a flight to safety. Investors appreciate capital preservation more than us trying to hit for the home run.”

Treasuries comprise about 3.5% of his US$500mil of assets, but he could buy more because he thinks their rally this year could continue. So far, it’s working.

His main fund has returned 1.7% in 2020, meaning he’s beating almost 70% of competitors, according to data compiled by Bloomberg.

Global investors have piled into havens, not least Treasuries, as the virus causes governments to shut down schools, impose travel restrictions and cancel business, entertainment and cultural events.

Rates on US sovereign bonds have fallen to record lows in the past month, with 10-year yields dropping below 1% on Tuesday.

That’s led to the biggest negative correlation between prices of US bonds and EM stocks, which have slumped almost 10% since January, in more than three years.

“We’re buying Treasuries mostly due to liquidity concerns, ” said McNamara, who’s based in London. “Our holdings are small, but not trivial. It is unusual, but these are unusual times.”

Arevalo of Jupiter has also taken to buying credit-default swaps protecting against defaults on US high-yield bonds.

Flows into the American high-yield market and EMs are closely correlated, but credit default swaps for the former are more liquid, he said. — Bloomberg

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