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As leaders fret, Bric dollar bonds beat debts in local currencies

As leaders fret, Bric dollar bonds beat debts in local currencies
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First Published: Wed, Jun 17 2009. 10 10 PM IST
Updated: Wed, Jun 17 2009. 10 10 PM IST
London: For all the criticism of the US currency by leaders of the Bric nations—Brazil, Russia, India and China—dollar bonds sold by the largest emerging market countries are outperforming debt traded in reais, roubles and yuan.
Prime Minister Manmohan Singh, Russian President Dmitry Medvedev, Chinese President Hu Jintao and Brazilian President Luiz Inacio Lula da Silva called for a more diversified monetary system on Tuesday to reduce dependency on the world’s reserve currency. The four leaders met in Yekaterinburg, Russia, where they planned to discuss buying each other’s bonds and foreign exchange, said Arkady Dvorkovich, Medvedev’s top economic adviser.
“It’s not up to politicians to determine which currency will be the world reserve currency,” said Lutz Karpowitz, a currency strategist at Commerzbank AG in Frankfurt. “In the end, the market decides it.”
Dollar bonds sold by China earned 11.4% in the past year, more than double the 4.6% for debt in yuan, JPMorgan Chase and Co. indices show. Brazil’s dollar bonds returned 3.6% as real-based notes lost 4.9%, and Russia’s US currency bonds outperformed with a 1.9% loss compared with a 7% drop in rouble debt. India doesn’t have?dollar-denominated debt.
Bonds sold in dollars have beaten domestic debt in part because Russia and China manage the rouble and yuan. Those denominated in the dollar can trade more freely, giving fund managers confidence they can sell the securities and get their money when needed.
“The result is limited foreign investment in local-currency bond markets,” said Ward Brown, who manages $5 billion (Rs23,950 crore) of emerging-market debt at Massachusetts Financial Services in Boston. “Only Brazil’s real is free-floating. India imposes capital controls to protect the rupee.”
“China and India are highly restrictive on the local debt side and Russia has quite an illiquid market for foreign investors,” said Cristina Panait, an emerging market strategist at Los Angeles-based Payden and Rygel. “Currency performance is a big portion of returns.”
The real rallied 11.2% last month, the rouble gained 6.9% and the rupee rose 6.4% against the dollar. The yuan appreciated 21% between July 2005 and July 2008.
Bric leaders say they want to take a larger role in the world financial system as their foreign reserves swell and the US economy endures its worst crisis since the 1930s. The dollar index, which measures the US currency against those of six trading partners, has dropped 9.4% from a three-year high in March.
The Bric nations account for 15% of the world economy and hold $2.8 trillion in foreign-currency reserves, or about 42% of the total, according to data compiled by Bloomberg.
“Statements about changing the global foreign exchange system are just a political gesture,” said Pablo Cisilino, who manages $10 billion in emerging-market debt at Stone Harbor Investment Partners in New York. “At the end of the day, there is only one reserve currency on the planet.”
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Michael Patterson in London, Sandy Hendry in Hong Kong and Oliver Biggadike in New York contributed to this story.
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First Published: Wed, Jun 17 2009. 10 10 PM IST
More Topics: Bric | Dollar | Bonds | Debt | India |