(Bloomberg) — Emerging-market investors are cherry-picking dollar bonds from some of the weakest developing economies as the rally in everything high-yield starts to fade.
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Junk bonds from the developing world, which notched double-digit gains in 2023 and 2024, started 2025 on a roll as well, with notes from Lebanon to Ecuador and Gabon leading advances in EM credits. But money managers say this is the last leg of a rally for the asset class, as it grapples with volatile swings in global markets, uncertainties in the Federal Reserve’s path, US tariffs and Chinese growth.
“The rally is pretty late-stage,” said Thys Louw, a portfolio manager at Ninety One UK Ltd. That’s a huge contrast to the start of 2023, when “you just needed to close your eyes and buy anything within the high-yield space.”
The strategy now, money managers say, requires more selectivity, moving into names that have lagged the broad gains that have taken some bonds — like Egypt and El Salvador — to near full value.
Arif Joshi, who oversees about $9 billion as co-head of emerging-market debt at Lazard Asset, likes dollar notes in Argentina due to what he says is the economic team’s “excellent policy.” He’s also bullish on sovereign notes in Suriname tied to oil development and those in Ukraine that will benefit from any peace deal and subsequent reconstruction.
“Focus on the idiosyncratic opportunities until the macro clears up,” Joshi said.
William Blair’s Marcelo Assalin and JPMorgan analysts including Luis Oganes and Jonny Goulden also see value in Ecuador. While February’s presidential election presents a binary risk for investors, the bonds are increasingly pricing in a win by market-friendly incumbent Daniel Noboa.
Securities from Argentina and Ecuador were among the top performers in 2024, with the former’s dollar bonds notching gains of more than 100%. So far this year, sovereign bonds with the lowest credit ratings have eked out gains, compared with a loss in the broader EM bond index.
Money managers are also looking for new opportunities within distressed debt. Carlos de Sousa, emerging-market debt portfolio manager at Vontobel Asset Management, said he’s increased exposure to bonds from Senegal, which got “cheap enough to compensate for the risks that were involved and it’s very likely that by midyear they will have a new IMF program.”