Return to long-term emerging market bonds

Investors in emerging markets (EM) began returning to long-term bonds, a popular investment vehicle late last year but one that has been costing them money in early 2024. Two consecutive months of below-forecast inflation in the U.S. have revived expectations that the U.S. Federal Reserve will cut interest rates, prompting a rally in long-term bonds. Dollar-denominated emerging-market government bonds with maturities of 10 years or longer have gained 5.3% since the beginning of May, outperforming all other categories, according to data compiled by Bloomberg. The same bonds had gained 6.9% year-to-date through April. “Investors have been avoiding long-term bonds like the plague. We believe EM government bonds, including longs, are well-positioned to perform well as the U.S. rate-cutting cycle begins,” said Guido Chamorro, senior portfolio manager at Pictet Asset Management in London. Arif Joshi, emerging markets debt manager at Lazard Asset Management, said data released in the U.S. shed light on next year, with growth of around 2% and inflation falling, creating a “great backdrop” for long-term bonds.