Weekly review of EM bond fund flows

Quotes from UniCredit Research: -Dedicated EM bond funds had net outflows of USD 643mn in the week ending 6 August, as inflows in hard-currency bonds come to an end. Local-currency bonds had outflows of USD 127mn, hard-currency bonds had outflows of USD 750mn while blend-currency funds saw inflows of USD 234mn. -Inflows from hard-currency bonds and blend-currency funds remain net positive on the year, while local-currency bonds continue to be the primary driver of outflows (USD -6.3bn). Year-to-date, blend-currency fund inflows amount to USD 4.5bn, while hard-currency fund inflows are USD 2.4bn. -Net bond inflows for the year continue to be impacted by outflows from local bonds. Over the last week, EM FX has continued to be very weak. EM Asian currencies have been soft with underperformance in the INR, KRW and PHP. -In CEE, performance deteriorated, led by significant declines in the RUB, TRY, HUF, PLN, and CZK, while among the LatAm majors, the BRL, MXN and COP were all down over the week. The four-week average flows remain at USD 0.4bn, which is down slightly on last week.

Source: FxWire Pro

Breakout Confirmed

We enjoyed a 2nd straight day firmly above the old highs of 1370 which helps confirm this breakout. The softening of the bond market may help provide the catalyst for the next leg higher.

How’s that?

We are likely near the end of a 30 year bond rally. Meaning rates have been going lower for 30 years making the bond market a safe and profitable haven for investors.

So now with rates bouncing up from historic lows, then bond investors will start losing money for the first time in a LONG TIME. When they look over their shoulder and see stocks making new highs, then naturally bond funds will see outflows and stock funds will see inflows. This fresh money coming into the stock market will help push it up to higher highs.

Best,

Steve Reitmeister (aka Reity… pronounced “Righty”)
Executive VP, Zacks Investment Research