Some EM investors are so nervous they’re piling into treasuries

US Treasuries are the polar opposite of what emerging-market investors should be buying.

But for some money managers who typically only focus on high-risk developing nations, they’ve become the asset of choice as they try to preserve capital.

With markets across the world reeling from the spread of the coronavirus, traders are being forced to come up with new ways of hedging their risks.

Among those who have turned to US government bonds are Alejandro Arevalo, who runs funds focused on emerging markets for Jupiter Asset Management Ltd., and Paul McNamara, who oversees more than $7 billion of developing-market fixed-income assets for GAM Investment Management.

“Investors pay us to buy emerging markets, but in this case you have to think outside the box,” Arevalo said, adding that he’s never held so many Treasuries. “It’s simply a flight to safety. Investors appreciate capital preservation more than us trying to hit for the home run.”

Treasuries comprise about 3.5% of his $500 million of assets, but he could buy more because he thinks their rally this year could continue.

So far, it’s working. His main fund has returned 1.7% in 2020, meaning he’s beating almost 70% of competitors, according to data compiled by Bloomberg.

‘Not Trivial’
Global investors have piled into havens, not least Treasuries, as the virus causes governments to shut down schools, impose travel restrictions and cancel business, entertainment and cultural events.

Rates on US sovereign bonds have fallen to record lows in the past month, with 10-year yields dropping below 1% on Tuesday.

That’s led to the biggest negative correlation between prices of US bonds and emerging-market stocks, which have slumped almost 10% since January, in more than three years.

“We’re buying Treasuries mostly due to liquidity concerns,” said McNamara, who’s based in London. “Our holdings are small, but not trivial. It is unusual, but these are unusual times.”

Arevalo of Jupiter has also taken to buying credit-default swaps protecting against defaults on US high-yield bonds. Flows into the American high-yield market and emerging markets are closely correlated, but CDS for the former are more liquid, he said.

Not all emerging-market specialists are convinced it’s time to turn to developed-nation assets. Kevin Daly, a money manager at Aberdeen Standard Investments in London, is instead building up cash and getting ready to purchase the debt of companies or countries whose spreads widen beyond what he thinks is justified.

“Most dedicated EM funds would not be buying US Treasuries,” said Daly, who’s part of a team overseeing $17 billion of developing-nation debt. “What if this bounces back sooner than we think? You’d get a double whammy as you’d lose money on USTs and miss some of the rally on EM bonds.”

© 2020 Bloomberg L.P.