NEW YORK - JPMorgan turned net bullish in sovereign debts, and declared overweight in the EMBI Global Diversified index, the Wall Street bank said in a bond buying strategy note.
We see the risk backdrop as benign for EM sovereigns in a not too cold, not too hot scenario that should benefit sovereigns, said the note.
Concerns over the impact of COVID - 19 Delta Variation on economic activity will limit a rise in core rates, with more stringent measures stopping short of complete lockdowns setting up a Goldilocks scenario, JPMorgan said.
EMBIG Spreads stood at 356 basis points on Thursday, according to Refinitiv data, which compares to a year end target of 310 bps at JPMorgan. Spreads widened past 720 bps as financial markets tightened to the first pandemic-induced lockdown in March 2020 and reacted to 330 bps in June last year.
The overweight call translates to bullish bets on Perusahaan Listrik Negara, an electric utility in Indonesia and Egypt.
Those two join Qatar, the Philippines, Panama, Mozambique, Ghana, Ivory Coast and Colombia in the overweight column of JPMorgan.
We have stronger conviction on tighter spreads rather than strong returns in the next few months, as our base case remains higher yields, which will dent returns, JPMorgan said. The confirmation of SDR allocations and tighter technicals are also supportive of cleaner spreads.
The International Monetary Fund announced on Monday that its largest-ever distribution of monetary reserves, $650 billion, would become effective on 23 August.
Given that EMBIGD spreads are now marginally wider on the year after the widening in recent weeks, we see room for spreads to re-price SDR upside, JPMorgan said.