Emerging-market bond fund inflows in the latest week were the strongest since the first quarter of this year because of falling U.S. Treasury yields, according to international fund tracking firm Emerging Portfolio Fund Research (or EPFR). Meanwhile, investors shied away from Japanese equity funds, which saw their first week of net outflows in 11 weeks.
Emerging-market bond funds posted inflows of $75.6 million, the most since March. Year-to-date inflows rose to $267 million for the fund group, with $16.3 billion in total assets. In the week ended Aug. 11, emerging-market bond funds tracked by EPFR posted returns of 1.09%, a tie for the third-best weekly performance this year.
"With the U.S. economic recovery appearing to be losing steam, there is a growing sense among emerging-market investors that the
could take a break in the next couple of meetings and that monetary tightening will be carried out at a more measured pace," says Brad Durham, a managing director at EPFR. "That is why emerging-market debt prices have rallied in the last few weeks and why emerging-market bond fund flows have stabilized."
Despite the Fed's 25-basis-point hike in overnight lending rates on Aug. 10, U.S. Treasury yields have been declining. This favors emerging-market bond prices as investors look for higher yields in riskier assets. In addition, analysts say there is some indication that investors are reopening carry trades, in which investors borrow short-term money at low rates and then invest it in higher-yielding securities such as emerging-market debt.
EPFR collects data on flows and allocations directly from about 7,000 funds with $3 trillion in assets that are based in countries around the world.
The 731 dedicated emerging-market equity funds tracked by EPFR with $98.4 billion in assets returned to net inflows for the first time in four weeks. A net $99.2 million went to these funds during the week. Global emerging-market (or GEM) funds and Latin America funds sustained modest outflows, while Asian equity funds, which exclude Japanese stocks, attracted the biggest weekly inflow, $161.9 million, since early June.
Finally, the 11 consecutive weeks of inflows into Japanese equity funds came to an end in the week ended Aug. 11, as investors pulled $198 million out of these funds.
"Investor sentiment towards Japan has taken a hit from record high oil prices, since Japan imports nearly all of its oil, and second-quarter GDP growth that was slower than anticipated," says Durham.