RPT-"Toxic Trio" of emerging markets complicates life for bond funds
(Repeats Thursday item with no changes)
By Sujata Rao
LONDON Feb 27 (Reuters) - High-yielding dollar bonds from Venezuela, Argentina and Ukraine, once at the core of most emerging debt portfolios, are deep in the red, leaving investors scrambling for the returns they once provided.
Dubbed the Toxic Trio by one investor, the countries have seen sharply higher political tension, falling central bank reserves and a default probability of over 50 percent in the coming five years, as priced by debt insurance markets.
Together, the three account for a tenth of the EMBI Global index, used by 80 percent of emerging debt funds, or around $250 billion. They also comprise 2 percent, or $50-$80 billion, of corporate debt indices, Nomura analysts calculate.
But because the bonds offer juicy interest rates, the trio's share in portfolios often far exceeds this threshold.
If the average emerging sovereign bond yields a 3.5 percentage point premium over U.S. Treasuries - under 6.5 percent in absolute terms - some Toxic Trio bonds yield around 10 percentage points more than U.S. benchmarks.
Even so, the risks are becoming too hard to stomach.
"We are underweight the Toxic Trio," Kevin Daly, a portfolio manager at Aberdeen Asset Management, told an Emerging Markets Trade Association forum last week. Continuación...