Taper tantrum haven may be found in emerging markets

London

EMERGING-MARKET euro-denominated bonds may offer investors a refuge from a potential surge in US yields in the second half of the year, according to Bank of America Corp.

The Federal Reserve may announce plans to taper its massive bond-buying campaign in September, Bank of America's London-based strategist Andrew MacFarlane said in a report. The bank predicts that could fuel a jump in Treasury 10-year yields to 2.15 per cent by the end of the year, from around 1.62 per cent on Tuesday. In comparison, it sees euro yields remaining stable.

"If US rates move higher around that potential taper announcement, EM EUR may be a relative haven from a total-return perspective," said Mr MacFarlane, who is based in London.

Developing-nation euro-denominated bonds outperformed their dollar peers during the 2013 "taper tantrum", when US yields shot higher as the Fed tried to prepare the way for a gradual reduction of asset purchases, according to Bank of America.

Still, the risk of a "negative surprise" at the European Central Bank meeting on June 10 and a dovish Fed makes emerging-market dollar bonds more attractive than euro-denominated securities in the short term, Mr MacFarlane said.

The ECB is increasingly expected by economists and investors to extend its elevated pace of emergency bond-buying at its next meeting, even as the economy rebounds.

"We would expect EM credit in both USD and EUR to react badly to any potential tapering, although EM EUR is likely to fare worse if EUR rates move higher," Mr MacFarlane wrote.

Emerging-market sovereign dollar bonds have returned 2.3 per cent this quarter, compared with the 0.2 per cent gain for euro-denominated debt, according to Bloomberg Barclays indices. BLOOMBERG