Investors are so convinced that 2014 will continue to be the opposite of 2013 that they're piling back into emerging-markets wagers that were among last year's biggest losers.

Buyers plowed $273.8 million two days ago into the biggest exchange-traded fund (ETF) focused on emerging-market debt, its largest one-day inflow ever, according to data compiled by Bloomberg. They're also demanding about the least extra yield in a year to own the debt of developing nations instead of benchmark securities.

So far, it's paying off. Bonds of countries from Turkey to Argentina are beating U.S. corporate notes and stocks with about 8 percent returns this year, according to JPMorgan Chase & Co. emerging-market bond index data.

Why? Easy money. Lots of it, all over the globe. Today, the European Central Bank (ECB) cut its deposit rate below zero, the world's first major institution to use such a measure, and is preparing to start an asset-purchase plan.

“The technicals of this market are almost impossible to fight,” said Karissa McDonough, the fixed-income strategist at People's United Wealth Management, which actively manages $5 billion.

In 2013, this same market lost 6.5 percent, plunging 9 percent last May and June as investors had palpitations over the Federal Reserve's plan to slow its monthly debt purchases.

Borrowing costs in the U.S. haven't surged as investors worried. Treasury yields have defied expectations by falling, not rising, even as the Fed curtails its bond buying.

While the Fed is winding down its stimulus, the ECB and Bank of Japan are ramping up their efforts and economists see global growth picking up. The world economy will probably expand at a 2.73 percent rate this year and a 3.11 percent pace in 2015, accelerating from 2.09 percent in 2013, according to analysts surveyed by Bloomberg.

Things are looking up in developing nations, too, as the International Monetary Fund forecasts their economies will expand 4.9 percent this year after growing 4.69 percent in 2013.

The consequence of all this monetary accommodation is that investors are looking for new ways to boost returns, finding markets such as high yield already crowded with cash. Global junk-bond yields dropped to a record low of 5.77 percent this week, Bank of America Merrill Lynch index data show.

People's United, based in Bridgeport, Connecticut, doubled its allocation to dollar-denominated emerging-markets debt in the past few weeks and reduced its allocation to U.S. speculative-grade bonds, McDonough said.

“There's a lot of dollars chasing yield,” she said.

The $5 billion iShares JPMorgan USD Emerging Markets Bond ETF has received $710 million of deposits in the past week, the most among fixed-income ETFs listed on U.S. exchanges, Bloomberg data show. It's returned 7.8 percent this year.

Developing countries may not be the darlings they were over the past decade, but when you're starting to see negative nominal rates surface in some parts of the world, those 5 percent average yields are pretty tempting.

Instant Insights /

Don't Fight the Money Train

Related Stories

Recommended For You