Traders hold firm on EM currency debt despite Fed

investmentnews.com:

Money managers are digging in their heels over a popular emerging-market bet in early 2024 even as the trade has unraveled five months into the year. 

Local-currency debt from developing nations has been roiled by odds of higher-for-longer interest rates in the US and a strong dollar. A Bloomberg index of local securities is down 1.1% year-to-date, while a similar gauge of hard-currency debt is up 1.2%.

But for Victoria Courmes at Grantham Mayo Van Otterloo & Co., who hailed local bonds as a “once-in-a-generation” opportunity in January, the local debt trade is far from dead. In fact, she says, it is more attractive than before. She argues that delays in interest-rate cuts by the Federal Reserve have forced central banks in emerging economies to postpone or slow the pace of their own monetary easing, widening real rates — which are adjusted for inflation — and offering investors better yields.

“Rates are still very high and that gap versus the US real yields has widened some more,” said Courmes. “It looks like actually EM rates are more attractive.”

The change of tack by EM policymakers was clear to see last week. Brazil’s central bank cut its benchmark Selic rate by a quarter-point, slowing after six consecutive half-point reductions. Policymakers in Mexico left rates unchanged, pausing after a single cut delivered in March, and Malaysia also held borrowing costs steady, citing risks from heightened market volatility as it braces for the growing likelihood that rates in the US will remain elevated for longer. 

Romania, where the central bank sets borrowing costs later on Monday, is another test case. While a cut “seemed a done deal just a few weeks ago,” reasons for caution have now entered the picture, according