Emerging Bonds Selloff Deepens as China Stocks Attract Inflows

(Bloomberg) -- Investors are souring on emerging-market bonds amid rising Treasury yields and the dollar, even as demand for developing-nation equities remains intact, according to a Jefferies Hong Kong report.

Global investors dumped the debt for a second straight week, the first time that's happened since November 2016. They pulled a net $1.2 billion in the April 26-May 2 period, the most in 11 weeks, according to EPFR data compiled by strategists Kenneth Chan and Tommy Tang. By contrast, investors bought a net $1.1 billion of emerging-market stocks ahead of China's inclusion in MSCI Inc.'s gauges in June, the data show.

“Over the past week, global bonds, commodities, equities and the money markets all experienced net withdrawals, the first time together since late March this year,” the analysts wrote in a note on Friday. The “EM equity purchase largely went to Chinese shares, ahead of its MSCI inclusion, while both the EMEA and Latin American regions witnessed outflows.”

The rising dollar and hardening Treasury yields are sapping demand for riskier assets. The Bloomberg Dollar Spot Index has risen 1 percent this week, set for a third straight week of gains. The Federal Reserve held interest rates in May, stoking speculation the central bank will raise borrowing costs next month, adding to headaches for investors.

Even so, the planned addition of Chinese-listed stocks in MSCI's benchmarks is supporting demand. About 300 billion yuan ($47 billion) will flow into A shares annually after the index provider adds mainland stocks to its gauges June 1, according to Citigroup Global Markets Asia.

To contact the reporter on this story: Eric Lam in Hong Kong at elam87@bloomberg.net.

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Tomoko Yamazaki, Ravil Shirodkar

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