The Sweet Spot for Emerging Market Bonds

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  • High-yielding EM government and corporate bonds are likely to perform well in negative yields environment as investors search for yield. Although debt level has been rising, interest cost has been declining. Profit growth has also been outpacing the increase in interest cost, which does not translate the increase in debt into higher vulnerability for EM government and corporates.

 

  • Various risk metrics show that majority of EM countries external risk profile has decreased significantly in the past decades as risky countries built a buffer against sudden pullback in capital flow. Issuance of local currency debt is outpacing its hard currency counterparts (check) and the capital in the banking sector is much higher than it was during previous crises periods.

 

  • Many EM currencies are cheap, according to our fair value model, making EM countries local currency bonds attractive. Historically local currency bonds outperform its dollar counterparts during period of Fed easing and dollar weakness.

 

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Published by Journeyman

A global macro strategist and equity portfolio manager with over seven years experience in the financial market, the author began his career as an equity analyst before transitioning to macro research, which led to his current job as quantitative equity portfolio manager at a bank. He read voraciously, spending most of his weekend reading The Economist magazine and books on finance, history, and psychology. The author also works part-time for Getty Images. To date, he has over 1200 pictures over 40 countries being marketed through the company.

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