Investors Shift From High-Risk Emerging Market Bonds

Emerging-market investors are reducing their exposure to high-risk dollar-denominated bonds as US Treasury yields reach their highest levels in nearly two decades. While credit spreads remain at their tightest since 2007 and returns reached 1.4% over the past year, money managers fear that persistent inflation and a resilient US economy will trigger more aggressive Federal Reserve tightening.

To mitigate these risks, JPMorgan Asset Management and other fund managers are shifting capital toward higher-rated credits in countries such as Indonesia, Saudi Arabia, and Morocco. Some firms are trimming positions in riskier markets, including Colombia and Angola, to avoid potential volatility.

Certain investors are further reducing their sensitivity to credit selloffs by moving risk toward local-currency bonds in markets like Mexico. Data from Chase Bank confirms that the current tight credit spreads on developing-nation dollar bonds have increased the incentive for this strategic reallocation.