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Man Group Says Emerging-Market Bond Values Don’t Make Sense

The world’s largest publicly traded hedge fund is turning wary on emerging-market dollar bonds after the securities rallied the most since the global financial crisis.

Investors have plunged into riskier assets in their hunt for yield, according to Man Group Plc, which managed $103.5 billion of assets as of Sept. 30. They now face mounting risks.

“This has resulted in fairly indiscriminate spread compression, pushing valuations on emerging-market dollar bonds to levels that no longer make sense when considering the credit and liquidity risks, particularly for the high-yield segment of the asset class,” said Lisa Chua, a portfolio manager on the emerging-markets debt team at Man Group, in an interview by email.

The premium on emerging-market dollar bonds fell to 215 basis points on Jan. 8, the lowest since 2007, according to a Bloomberg Barclays index. The strength in developing debt comes after central banks globally remained accommodative and kept interest rates near historical lows in recent years.

But as the Federal Reserve is poised to raise rates further and other central banks hint that they may reduce stimulus in the near future, Man Group isn’t alone in sounding the alarm on junk debt.

Steve Cook, co-head of emerging-markets fixed income at PineBridge, sees some valuations as stretched and is avoiding riskier bonds, such as Tajikistan’s $500 million of 7.125 percent notes. He’s still bullish on Latin America.

BNP Paribas Asset Management money manager Colin Harte has a positive outlook globally thanks to a “Goldilocks environment” of economic growth and low inflation.

Some investors could face a “rude awakening” as central banks “drastically slow” the pace of balance-sheet expansion, warns Man Group.

“We remain cautious going into 2018 as we believe the exit door will not be wide enough should the tide reverse, and are looking for alternate entry points to re-add risk,” said Man’s Chua.

This article was provided by Bloomberg News.

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