Foreign investment in the bonds of emerging markets nations is soaring, particularly in Asia.
According to the Wall Street Journal, foreigners owned 27% of Indonesia's local-currency government bonds as of July, which was up sharply from just 16% one year before.
18% of Malaysian local-currency debt was held by foreigners as of July, up from 10% one year ago. Foreign ownership of Thai baht-denominated government debt has doubled year over year.
It's the ultimate quantitative easing-driven trade given that U.S. investors can both enjoy higher interest rates and potential currency appreciation against the U.S. dollar.
"We've seen a move into buying Mexican debt in pesos, and that will continue. Local governments prefer to have debt in their own currencies rather than dollars. That was the sin of the past, the sin of the 80s," he said.
Local-currency emerging-market government bonds have returned almost 13.3% this year, according to Barclays Capital indexes, compared with 11.8% for U.S. high-yield bonds. The Dow Jones Industrial Average, meanwhile, closed Monday up 3.1% on the year.
"I can't think of many asset classes out there that are investment grade and liquid with those kind of returns," said Francisco Javier Murcio, deputy portfolio manager for emerging-market strategies at Standish Mellon Asset Management in Boston.
Nothing attracts investor interest like recent performance, and the entire phenomenon is an example of how easy money in developed markets like Japan and the U.S. can spillover into markets all over the world. What they call 'reflation' in Japan can end up as asset inflation in Mexico.
Disclosure: No Positions