First capital inflow to emerging market funds

Bloomberg

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Funds that invest in developing-nation debt took in $13 million in the week ended Jan. 7, after withdrawing $65 million the previous week, ING Financial Bank said in a report, citing data published by EPFR Global, a research company.

The biggest financial crisis since the Great Depression prompted investors to shun all but the safest government debt last year.

"Redemption flows have slowed and some asset managers will find themselves having cash to put to work again," said Joel Kim, head of Asian debt at ING Investment Management in Hong Kong, which oversees $8 billion of emerging-market assets. "Sentiment is much better now than it was in October but I wouldn’t think it’s a straight-line improvement from here."

The extra yield investors demand to own developing-nation debt instead of U.S. Treasuries was 6.55 percentage points Thursday, according to JPMorgan’s EMBI+ Index. The spread averaged 6.92 points in the past three months and peaked in 2008 at 8.65 points on Oct. 24.

Sales of debt
Developing nations may increase sales of dollar-denominated debt by 68 percent to $65 billion this year, ING said in a separate report published on Dec. 18, as governments tap overseas markets to replenish their currency reserves and cover budget deficits.

Mexico, Brazil, the Philippines, Turkey and Colombia raised a combined $6.5 billion by selling new dollar-denominated bonds in the past month. Chile, Malaysia, South Korea and Indonesia may also tap the market in 2009, New York-based Brown Brothers Harriman said in a report.

"The risk appetite is gradually returning," said Hong Kong-based Kenneth Hau, who helps oversee $10 billion in Asian assets as portfolio manager at LGT Investment Management. "All these recent deals were well received."

The Philippines on Jan. 8 sold $1.5 billion of 10-year notes to yield 8.5 percent, or 6 percentage points more than U.S. Treasuries, while Turkey sold $1 billion of eight-year securities to yield 5.01 percentage points above Treasuries.

Investors pulled $18 billion from emerging-market bond funds last year as the dollar shortage caused Pakistan to seek an International Monetary Fund loan and forced Ecuador to default, according to EPFR data.

The cost of borrowing in dollars in London for three months slid to 1.35 percent Thursday, from as high as 4.82 percent on Oct. 10.