Emerging market bonds are 2021's best performers

Emerging market bonds were supposed to be dragged down this year as central banks moved towards withdrawing stimulus.

Instead, the best-performing global debt all came from developing nations.

Sovereign bonds issued by South Africa, China, Indonesia, India and Croatia topped the rankings of 46 markets around the world this year, according to data compiled by Bloomberg until last Thursday.

They alone managed to shrug off the biggest annual jump in US Treasury yields since 2013, a shock that was powerful enough to upend currency carry trades and emerging market stocks.

The positive returns generated by the five markets should give investors at least some confidence that the US Federal Reserve will be able to wind down asset purchases and start to raise interest rates without triggering a spike in global volatility. A deeper look into 2021 performance shows that the top performers have mostly fallen in price, but coupon returns were high enough to offset these losses.

Emerging market bonds as a whole have fallen 1.4 per cent this year, a separate Bloomberg index shows. That is still far better than they did during the so-called taper tantrum of 2013, when the Fed's signal that it would cut asset purchases saw them decline 3.8 per cent over the year, including a slump of 11 per cent from a high in May to a low three months later.

Coupons and interest rate differentials will "play a strong part" in investment decisions in a tightening environment next year, said Mr Shafali Sachdev, head of fixed income, currencies and commodities for Asia at BNP Paribas Wealth Management in Singapore.

"Investing in select emerging market bonds may be a preferential way to achieve this, rather than lengthening duration or going down the credit curve."

South Africa's bonds have been the global pacesetters this year, with a total return of 8.6 per cent. Chinese securities gained 5.6 per cent, Indonesia's climbed 5.2 per cent, India's rose 2.7 per cent, and Croatia's increased 1 per cent.

The biggest losses were seen in Hungary, Peru and Chile - where central banks raised interest rates during the year.

Bonds in South Africa, Indonesia and China look set to extend gains into next year, according to HSBC Holdings.

A "mildly bullish stance" is warranted on South Africa, as its debt market has one of the steepest curves and highest real yields within emerging markets, and offers quite sizeable carry, even on a currency-hedged basis, analysts led by Mr Andre de Silva in Hong Kong wrote in a research note.

Finisterre Capital is also positive on the debts of South Africa and Indonesia.

There has been a lot of improvement in fiscally challenged countries in emerging markets this year, including South Africa, said Mr Damien Buchet, chief investment officer at the London-based investment manager, which focuses on emerging market debt.

"We still love" its bond market for that reason, he said.

BLOOMBERG