Investors hooked on EM bonds despite rising valuation concerns
By Paul Kilby
NEW YORK, Aug 24 (IFR) - Latin American bonds may be overvalued but funds dedicated to the asset class, overwhelmed by flows from investors gripped by a global hunt for yield, may have little choice but to continue buying them.
Since late July, a whopping US$6bn has flooded emerging market bond funds as investors took an overweight position in EM debt for the first time since the so-called taper tantrum in May 2013, according to the Institute of International Finance.
Though this level of involvement in the region's debt was initially welcomed after a tough couple of years, some market players said it has now pushed valuations to levels that made little sense based on underlying fundamentals.
"We are getting to levels where spreads don't compensate for risk," said Jorge Piedrahita, CEO of broker Torino Capital LLC.
"Argentina 2019s are almost at 3%. The country was in default just six months ago. There is a lot of complacency in the market place."
Reference spreads on the CEMBI - JP Morgan's EM corporate index - recently hit a 13-month low at 308bp, marking a year to date return of 12.56%. That return is an even larger 18.25% for the Latin American composite of the index.
"You have to really go back to early 2013 to see a sustained period of spreads at these levels," said Jason Trujillo, a senior credit analyst at Invesco.
"But at that time corporates had a stronger fundamental backdrop, now you have a more challenging picture. This leaves me a bit cautious." Continuación...