Morgan Stanley cautious on emerging market bonds, says Fed rate cut may not spur inflows
1min read Morgan Stanley has taken a cautious stance on emerging market sovereign bonds, saying that the Federal Reserve's rate cut is unlikely to spur a big inflow into bond funds. Strategists including Simon Waever recommend investors take a short-term bearish view of the asset class, either by increasing cash levels in the portfolio, opting for investment-grade notes over riskier bonds, or selling emerging market credit default swap indexes. The bank removed Nigeria, Argentina and Morocco from its preferred bond basket and added Mexico and Romania, which have become "cheaper," according to a report released Monday. The bank's forecast is tempered by the fact that U.S. interest-rate markets have already priced in a soft landing. "Any further decline in U.S. Treasury yields could bring negative risks," the strategists said. "It may take up to 12 months after the first cut for money to flow from money market funds into risk assets." The team said that, in addition to the Fed debate, emerging market spreads are "far from cheap" and fiscal accounts "almost universally deteriorated" and growth continued to slow. The strategists recommend selling emerging market credit default swap indexes with a target spread of 190 basis points and a stop at 155 basis points. The spread is currently 167 basis points. Notably, developing countries are strengthening their defenses against volatility and have been on a bond issuance binge, with more than $28 billion in bonds issued by governments and companies in emerging markets as of Friday, compared with $12 billion in the same period a year ago, according to data compiled by Bloomberg. Many issuers are trying to get their deals done before the U.S. presidential election in November and another bout of growth panic like the one that hit on Aug. 5. "Most issuers have chosen to enter the market before potential volatility," said Alexander Karolev, head of Morgan Stanley's CEEMEA syndicate. "The volume of deals in the coming weeks will be significantly lower due to risk events."