Wall Street's biggest firms are predicting intensifying bondlosses in emerging markets, where borrowing costs have alreadysoared to the highest level in more than four years versus U.S.corporate debt, as the Federal Reserve considers curtailing recordstimulus.

“We're not yet convinced that we've seen the worst in terms offlows out of emerging markets,” Jeffrey Rosenberg, the chiefinvestment strategist in fixed-income at New York-based BlackRockInc., the world's largest asset manager, said in a telephoneinterview, expressing his own views. “We see a lot of valuationchange but we see the potential for even more valuationchange.”

Investors have yanked $22.1 billion from emerging-market bondfunds since the end of April, almost five times the amount pulledfrom U.S. corporate credit, according to EPFR Global. That's pushedthe extra yield that buyers now demand to own dollar-denominatedemerging-market debt instead of U.S. company notes to 1.4percentage points, about the most since December 2008.

Borrowing costs are soaring from record lows reached in Januaryas speculation deepens that the Fed will curtail its so-calledquantitative easing as soon as this month, signaling an end to theflood of cheap money that propped up asset prices from India toChina and Indonesia. The exodus from developing nations began afterFed Chairman Ben S. Bernanke told Congress on May 22 that thecentral bank could scale back the pace of its $85 billion ofpurchases of mortgage bonds and Treasuries if the U.S. economyshowed sustained improvement.

'Defensive View'

Emerging-market debt has lost 7.9 percent since the end ofApril, versus a 5.1 percent decline on U.S. corporates, Bank ofAmerica Merrill Lynch index data show. While an expansion in theworld's biggest economy is accelerating, growth in China isprojected to slow to 7.5 percent this year from as high as 14.2percent in 2007, according to 53 economists surveyed byBloomberg.

“Given the likelihood of further rate volatility and anuncertain emerging-markets growth outlook, we maintain ourdefensive view” on corporates from developing countries, analystsled by Eric Beinstein in New York at JPMorgan Chase & Co., theworld's largest underwriter of corporate bonds, wrote in a Sept. 5report.

Elsewhere in credit markets, the extra yield investors demand tohold corporate bonds worldwide instead of government securitiesrose for a third week. Sprint Corp. led bond sales to the highestlevel since May with the biggest high-yield offering in more thanfive years. Loan prices increased.

Relative yields on investment-grade bonds from the U.S. toEurope and Asia widened 1 basis point to 149 basis points, or 1.49percentage points, according to the Bank of America Merrill LynchGlobal Corporate Index. Yields rose to 3.225 percent from 3.088percent on Aug. 30.

The cost of protecting corporate bonds from default in the U.S.declined. The Markit CDX North American Investment Grade Index, acredit-default swaps (CDS) benchmark that investors use to hedgeagainst losses or to speculate on creditworthiness, decreased 2.2basis points last week to a mid-price of 81.8 basis points,according to prices compiled by Bloomberg.

The Markit iTraxx Europe Index of 125 companies withinvestment-grade ratings dropped 1.6 to 102.7 to the lowest levelsince Aug. 26 at 10:28 a.m. in London. In the Asia-Pacific region,the Markit iTraxx Asia Index of 40 investment-grade borrowersoutside Japan fell 5.7 to 140.

The indexes typically fall as investor confidence improves andrise as it deteriorates. Credit swaps pay the buyer face value if aborrower fails to meet its obligations, less the value of thedefaulted debt. A basis point equals $1,000 annually on a swapprotecting $10 million of debt.

The Bloomberg Global Investment Grade Corporate Bond Index hasdeclined 0.63 percent this month, bringing losses for the year to3.95 percent.

Bonds of Verizon Communications Inc. were the most activelytraded dollar-denominated corporate securities by dealers lastweek, accounting for 3.9 percent of the volume of dealer trades of$1 million or more, according to Trace, the bond-price reportingsystem of the Financial Industry Regulatory Authority.

The New York-based company will meet investors in the U.S. andEurope this week as it prepares to sell as much as $50 billion ofdebt to buy Vodafone Group Plc out of their wireless joint venture,according to a person with knowledge of the matter. A firstoffering may exceed Apple Inc.'s record $17 billion issue in April,another person said last week.

Sprint, the third-largest U.S. wireless carrier, led $80.4billion of corporate bond sales worldwide, the busiest week since$123.9 billion was issued in the five days ended May 17 and up from$42.3 billion in the prior period, according to data compiled byBloomberg.

The Overland Park, Kansas-based company, acquired in July byJapan's SoftBank Corp., sold $6.5 billion of eight- and 10-yearnotes on Sept. 4 in the biggest junk offering since Intelsat priced$7.1 billion of bonds through three units in June 2008, Bloombergdata show.

The Standard & Poor's/LSTA U.S. Leveraged Loan 100 indexrose 0.04 cent to 97.68 cents on the dollar, the highest since Aug.22. The measure, which tracks the 100 largest dollar-denominatedfirst-lien leveraged loans, has returned 3.11 percent thisyear.

In emerging markets, relative yields narrowed 8.9 basis pointslast week to 366.2 basis points, according to JPMorgan's EMBIGlobal index. The measure has averaged 307.4 this year.

'Disproportionate Selloff'

Following average annual returns of 15.3 percent in the fouryears ended last December, dollar-denominated emerging marketsnotes have lost 6.8 percent this year, according to Bank of AmericaMerrill Lynch index data. That compares with a 2.9 percent loss in2013 on the Bank of America Merrill Lynch U.S. Corporate & HighYield index.

“Developed markets paper has held in much better than emergingmarkets paper,” said Stephen Antczak, the head of U.S. creditstrategy at New York-based Citigroup Inc., the second-biggestunderwriter of emerging-market bonds. “What worries me is if youdon't have this natural support in place, you could get adisproportionate selloff in emerging markets.”

Investors are withdrawing more cash from developing nations'bonds after pouring $58.8 billion last year into funds that buy thedebt, EPFR data show. Emerging-market debt was seen as a haven withhigher-yielding securities amid a U.S. stimulus program that'sfunneled more than $2.6 trillion into the financial system sinceSeptember 2008.

Yields on the Bank of America Merrill Lynch U.S. EmergingMarkets External Debt Sovereign and Corporate Plus index haveclimbed to 5.73 percent after reaching an all-time low of 4.04percent on Jan. 24.

The gap in yields with U.S. company debt widened to as much as1.44 percentage points on Aug. 31, the most since reaching 1.47percentage points on Dec. 1, 2008.

The $22.1 billion of outflows from emerging-market debt funds inthe past four months compare with $4.6 billion of withdrawals fromU.S. corporate bond funds, EPFR data show.

Asian economies have been among the hardest hit. A JPMorganindex of Indian dollar-denominated bond yields touched 6.525percent on Sept. 5, the highest since January, with BNP Paribas SAforecasting economic growth of 3.7 percent through next March,compared with a 10-year average of about 8 percent.

India is “one country we're completely avoiding and have beendoing so for 12 months,” said Hayden Briscoe, a Hong Kong-baseddirector of Asia-Pacific fixed-income at AllianceBernstein HongKong Ltd.

Fed Meeting

The U.S., which plunged into a recession five years ago asspiraling home values prompted a credit seizure, will probably growby 2.7 percent next year and 3 percent in 2015, from 1.6 percentthis year, a Bloomberg survey of 73 economists shows.

With the Fed expected to start decreasing its bond-buyingprogram at its Sept. 17-18 meeting, borrowing costs have climbedfor bonds globally. Yields on 10-year Treasuries reached 2.99percent on Sept. 5, the highest since July 2011.

The underperformance of emerging-market debt relative to U.S.corporate notes has been sustained for one of the longest periodsin history, the JPMorgan analysts wrote in their report.

“When underperformance causes a selloff in the market andliquidity worsens as a result, you have a huge gapping inrisk valuation,” said Edwin Chan, the head of credit research atUBS AG in Hong Kong.

While the rout may eventually present a buying opportunity—MarkMcCombe, BlackRock's Asia-Pacific chairman, talking to Bloomberg TVtoday, said China's economy is stablizing and he's “pretty positiveon it”—losses for emerging markets debt have the potential toaccelerate, BlackRock's Rosenberg said.

“Emerging markets risk has gone up more than the risk associatedwith U.S. corporates,” Rosenberg said. “We're not yet ready to sayit's time to pile into emerging markets.”

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