Taking a Look at Emerging-Market Bonds, Tax Questions
After my recent
"The short answer to your question is 'No,'" says Graham Stock, a vice president at Chase Securities' international fixed income department. "Emerging-market bonds usually fall when equities (in emerging markets or in the main financial centers) fall."
There are exceptions to the rule, but in general, when an emerging market is doing well economically, the government is better able to pay its bills, and at the same time, the outlook for equities is strong.
"The most direct explanation for this phenomenon is that the rally in U.S. Treasuries that usually accompanies a fall in equities represents a flight to quality," says Stock. "Emerging-market bonds are inherently more risky than U.S. Treasuries, and so they suffer from the flight rather than benefit from it." In both emerging and developed economies, equity markets tend to fall when prospects for economic growth deteriorate.However, slow economic growth can have a much greater impact on an emerging economy because it "undermines the emerging market governments' ability to continue to service its debt and therefore pushes up the default risk for the bonds," Stock says. Ironically, this year is an exception to this rule. The equity markets of emerging economies have produced pretty lackluster results this year, with a few notable exceptions. Emerging-market debt, however, has been a solid performer. The returns on emerging-market bond mutual funds as a category are up 10.6% this year, while emerging-market equity funds are down 20.6%, according to Morningstar. Part of this can be explained by the high oil prices, which have helped improve the financial picture of the oil-producing emerging markets. At the same time, most stocks in emerging markets are down because of concerns about the impact of an economic slowdown in the U.S. -- concerns of which, of course, partly stem from the high oil prices. However, many emerging markets that are not oil producers, such as Brazil, are in pretty good economic shape with minimal concerns about the risk of default. Moving on, after reading my
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