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Funds see end to emerging market bond rally as currencies tumble

Foreign investors pulling out of domestic debt as interest rate reductions have cut yields, lowering spreads

Singapore

THE last time developing nations' local bonds were this expensive relative to their dollar debt, the biggest losses on record ensued. Some of the world's largest fund managers say another selloff may be in the offing now.

Domestic notes sold by emerging-market governments have returned 2.6 per cent this year in local-currency terms, the best start to a year since 2005, as interest-rate reductions from Indonesia to Romania cut yields to within 0.50 percentage point of equivalent dollar-denominated bonds. That's too small a spread to reward buyers for the exchange-rate risk, according to investors including Fidelity Worldwide Investment and Pictet Asset Management.

"We remain cautious on...

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