Investors win big betting on Brazilian debt
By Paul Kilby
NEW YORK, April 6 (IFR) - Investors with a stomach for volatility are reaping hefty rewards for taking risky bets on Brazilian debt, with the sovereign's bonds clearly outperforming other emerging market credits.
Mired in its worst recession in decades and racked by a widening corruption scandal, Brazil has become the high risk but high return play that once typified EM investments of the past.
Investors are buying the debt amid expectations that President Dilma Rousseff will likely be impeached, shortening the unpopular head of state's term in office and opening the way for fiscal reform.
That, combined with renewed risk appetite for emerging markets - thanks to Fed Chairman Janet Yellen's dovish comments in late March, fading worries about a hard landing in China and a more supportive oil market - have spurred a dramatic turnaround in Brazilian bond prices.
"All the woes that were plaguing EM are somewhat diminished," said Sean Newman, a senior portfolio manager at Invesco Fixed Income who oversees emerging market and government bonds. "You could call it the JOC principle - Janet, Oil and China."
Year to date, the Brazil component of JP Morgan's EMBI Global Diversified Index, which tracks sovereigns' hard currency bonds, takes the lead spot with a 12.88% return, putting it ahead of Ecuador at 12.49%, but way ahead of its other EM peers whose returns are still in the single digits.
As in the sovereign universe, Brazilian corporates were also top performers during the first quarter, providing a 7.5% return over that period versus 3.6% for EM corporates overall, according to a recent Citigroup report.