Bond traders struggle to pick winners in riskiest markets

Morgan Stanley prefers debt rated BB and stronger single B, urging investors to differentiate between credits by assessing borrowers’ external funding vulnerabilities and prospects for reforms as the coronavirus pandemic pressures economies.

DISCERNING investors could eke more gains out of developing-nation bonds, but the bulk of the rally in the riskiest corners of the market may have passed.

The gap between spreads on emerging-market high-yield debt and global peers has narrowed from a record 470 basis points in May to 127 basis points, close to the 10-year average of 94. Developing-nation high-yield bonds lost 1% in January, halting a two-month rally that handed investors returns of more than 8%.