Global 'Big Players' Buying Emerging Market Bonds... "Low Possibility of US Recession"

Rising Expectations for US Soft Landing Boost Developing Countries' Asset Bets
Concerns of Another Downturn Resurface Amid US Recession Fears

As expectations for a soft landing of the U.S. economy grow, global asset management firms appear to be rushing to buy emerging market bonds. This is based on the reason that if the U.S. central bank, the Federal Reserve (Fed), moves toward cutting interest rates, high-yield assets in developing countries could experience an upward trend.

According to Bloomberg on the 18th (local time), JP Morgan Asset Management, M&G Investments, and Aviva Investors have recently increased their holdings of emerging market bonds, taking advantage of the recent decline in risk asset prices. Bloomberg explained, "Despite fears of a U.S. recession resurfacing among some in the fund industry, they are betting on expectations of a (soft landing) following Fed rate cuts."

Last week, U.S. retail sales and the employment market showed stronger-than-expected resilience, and major retailer Walmart posted strong earnings, lowering the possibility of a U.S. recession.

According to the Bloomberg index, if the recent pace of yield increases on emerging market dollar sovereign and corporate bonds continues throughout the year, returns of over 8% are expected. This is about twice the yield of U.S. bonds.

This trend clearly contrasts with earlier this month when fears of a recession were emphasized due to shocks in U.S. employment data. The JP Morgan EMBI Global Diversified Index, a benchmark for emerging market sovereign bonds, rose for nine consecutive days during this period, the longest streak in six years. Accordingly, in the week ending on the 7th, 4 billion dollars were withdrawn from emerging market bond funds.

With the significantly reduced possibility of a U.S. economic recession, global asset management firms have emphasized investment in sovereign bonds of emerging countries, which involve high risk and high return, among emerging market bonds that showed weakness earlier this month. M&G Investments purchased Peruvian bonds. Aviva Investors stated, "Ecuador and Ukraine bonds could present significant opportunities."

However, there are warnings that if the Fed cuts rates in response to weak economic indicators rather than easing inflation, a new risk-aversion scenario could unfold. Bikram Rahul Agarwal, chief fund manager at Jupiter Asset Management, forecasted, "If a clear deterioration in global economic data is observed, foreign currency bonds of developing countries could weaken."