Emerging market bond ETF BlackRock sees capital inflows as investors turn to risk

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SEMB recorded the third strongest ETF inflow in Europe last week

BlackRock’s dollar-denominated emerging markets bond ETF was among the top three fixed income inflows last week as investors took on more risk after a weaker-than-expected reading of US inflation.

According to data from Ultumus, the $8.2 billion iShares JP Morgan $EM Bond UCITS ETF (SEMB) saw inflows of $366 million in the week to August 12, the third most big entry of the week after investment grade bonds and longer duration US Treasuries ETFs.

In a note, Morgan Stanley turned bullish on emerging market sovereign credit for the first time since 2020, Bloomberg reported, as a consumer price inflation (CPI) reading of 8.5% in United States inspired a rally in risk and saw investors reduce bets on continued hawkish policy at the Federal Reserve.

Morgan Stanley analyst Simon Waever said the yield spread between emerging market sovereign debt and US Treasuries continued to decline after hitting a two-year high in July. He argued that spreads could contract by up to 50 basis points in the coming months.

Lower yields demanded by investors for exposure to emerging market debt (EMD) naturally sparked a period of positive returns in benchmarks such as the JP Morgan EMBI Global Core Index tracked by SEMB, which in turn encouraged the recent wave of entries.

For most of the first half of the year, emerging markets went out of fashion for good as sovereign and private issuers faced pressure to repay debt denominated in an increasingly strong US dollar. Additionally, recession fears in major economies have prompted many investors to turn away from risk, preferring safe-haven fixed-income securities such as US Treasuries.

Between the less hawkish signals from the Fed at its latest policy meeting and the less severe US CPI reading last week, investors felt more comfortable looking for opportunities lower on the scale. credit rating.

Whether this turns out to be the right move will be tested at the Fed’s meeting in Jackson Hole next week, where markets will hear messages from Chairman Jerome Powell on the state of the economy and his plans. for the next round of interest rate hikes.

JP Morgan remains cautious about the duration of the recovery in emerging markets. Last week, strategists led by Trang Nguyen suggested clients offload less liquid exposures at opportunistic prices and buy hedge positions before a sell-off, Bloomberg reported.

The bank said that while spreads may continue to narrow depending on capital inflows, its strategists continue to be defensive in their fixed income allocations.

“While fears of an impending recession have eased compared to our last report a month ago, the combination of tighter monetary conditions and lingering recession risks should continue to pose key cyclical headwinds for market sovereigns. emerging markets,” its analysts said.

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