Going against the trend by shorting is extremely costly! Asset management giant Carmignac warns: Emerging market bond markets are entering a structural bull market

Headquartered in Paris, asset management giant Carmignac Gestion SA recently issued a warning: traders should think twice before selling emerging market bonds, as funds are preparing to continue flowing into this asset class. The fund manager overseeing approximately €3.7 billion (about $4.4 billion) in emerging market fixed income assets, Alessandra Alecci, analyzed that emerging economies are showing three major structural advantages: first, their economic growth rates continue to outpace developed economies; second, some national leaders demonstrate a stronger sense of policy responsibility; third, monetary policy remains within a prudent framework, and overall debt levels are relatively manageable.

Market expectations for a rate cut in the U.S. are rising, which is driving investors to seek higher-yielding opportunities in other markets. As a result, funds tracking emerging market assets have become one of the biggest beneficiaries. This week, despite a sell-off in tech stocks and commodities impacting emerging market equities and some currencies, emerging market bonds were almost unaffected.

Notably, emerging market bonds denominated in major currencies delivered a return of 12.2% last year, marking the best performance since 2012. Although it may be difficult to replicate this achievement this year, Alecci stated that the rally in emerging market bonds is far from over.

In an interview this week, Alecci said, “The influx of these funds, driven by diversification purposes, combined with very strong fundamentals—who would want to block this trend?”

Currently, the yield premium demanded by investors for emerging market bonds over U.S. Treasuries is only 240 basis points, or 2.4 percentage points, reaching the lowest level since 2013.

However, Alecci pointed out that many emerging markets still offer highly attractive interest rate conditions for arbitrage trading. By arbitrage, she refers to investors who borrow in low-interest-rate currencies and buy high-interest-rate currencies to profit from the interest rate differential. She specifically cited Brazil, Colombia, and Turkey as examples.

Alecci said, “Indeed, the spread has narrowed, and in some cases, caution is needed to avoid risks, but many countries still offer quite substantial yields.”

Emerging Market Bonds Hide “Value Pockets”

According to Alecci, the broad upward trend in commodities will continue to support demand for emerging market bonds. She pointed out, “Many emerging markets are producers of key metals involved in the artificial intelligence revolution and the green revolution. In my view, this positive momentum will persist.”

In Carmignac’s investment portfolio, Alecci specifically mentioned Hungarian local currency bonds. She analyzed that after the April parliamentary elections, Hungary is highly likely to usher in “meaningful reforms,” and from the current situation, the Hungarian central bank has room to cut interest rates.

Alecci also revealed that Carmignac has investments in Romania. She noted that Romania has already implemented “significant” reforms in public finances. The fund manager further stated that frontier markets such as Ivory Coast, Benin, and Egypt, as well as Uzbekistan, a major gold producer, all have good investment potential.

Alecci said, “If you carefully study the fundamentals of some of these investment targets, you’ll find they are quite solid and reliable. The market’s positive reception to these assets is itself very encouraging, even sparking a wave of optimism in other market sectors.”