Yield-Duration Opportunity in EM Bonds
17 November 2022
Central bank rate hikes in both emerging and developed markets have led to higher fixed-income yields across the board, providing investors with significantly higher levels of carry compared to the start of the year. Compared to the U.S. and other developed markets bonds, EM bonds not only provide significantly higher nominal and real yields on average but also shorter durations. As shown in the chart below, the yield-per-unit-of-duration ratio for EM bonds is particularly attractive relative to other asset classes among high-yield corporates and local currency sovereigns.
Yield-Duration Profile
Source: VanEck, ICE Data Indices, LLC., J.P. Morgan Index Research, as of 31/10/2022. EM USD HY Corp is represented by the ICE BofA Diversified HY US Emerging Markets Corporate Plus Index. EM USD Sov is represented by the J.P. Morgan EMBI Global Diversified Index. U.S. HY is represented by the ICE BofA US High Yield Index. EM Local Sov is represented by the J.P. Morgan GBIEM Global Core Index. U.S. AGG is represented by the ICE BofA US Broad Market Index. Global AGG is represented by the ICE BofA Global Broad Market Index. Yield per Duration is expressed by yield-to-worst being divided by effective duration.
As of 31 October, 2022, EM USD High Yield Corporate Bonds provided the highest yield among the asset classes shown, at 13.15% or 375bps higher than EM USD Sovereign Bonds and 410bps higher than US High Yield Corporate Bonds. EM Local Currency Sovereign Bonds provided a yield of 8.36%, which is notable given that the asset class is, on average, rated investment grade.
Inflation remains persistently high, and the Federal Reserve has signaled that while it may start to slow the pace it is not yet done with rate hikes. In this environment, EM bonds may be particularly appealing compared to U.S. and global bonds as a source of income. EM USD High Yield Corporate Bonds currently provide the highest yield per unit of duration, substantially above US HY bonds due to both a higher yield and lower duration. This additional “carry” would enable EM HY corporates to absorb a greater degree of either higher base rates or wider credit spreads. EM Local Currency Sovereign Bonds also provide an attractive yield per duration, with the added benefit of diversification since these bonds are less directly impacted by movements in U.S. interest rates.
Index definitions
ICE BofA Global Broad Market Index tracks the performance of investment-grade debt publicly issued in the major domestic and Eurobond markets, including sovereign, quasi-government, corporate, securitized and collateralized securities.
ICE BofA Diversified High Yield US Emerging Markets Corporate Plus Index: is comprised of U.S. dollar-denominated bonds issued by non-sovereign emerging markets issuers that are rated below investment grade and that are issued in the major domestic and Eurobond markets.
ICE BofA US High Yield Index: is comprised of below-investment grade corporate bonds (based on an average of Moody’s, S&P and Fitch) denominated in U.S. dollars. The country of risk of qualifying issuers must be an FX-G10 member, a Western European nation, or a territory of the U.S. or a Western European nation.
ICE BofA US Broad Market Index tracks the performance of US dollar-denominated investment grade debt publicly issued in the US domestic market, including USTreasury, quasi-government, corporate, securitized and collateralized securities.
J.P. Morgan EMBI Global Diversified Index: is comprised of U.S. dollar-denominated Brady bonds, Eurobonds, and traded loans issued by emerging markets sovereign and quasi-sovereign entities. The index weighting methodology limits the weight of countries with larger debt stocks.
J.P. Morgan GBI-EM Global Core Index (GBIEMCOR): tracks local currency denominated EM government debt. The index weighting methodology limits the weight of countries with large debt stocks, with a maximum of 10% and a minimum of 1% to 3% depending on the amount of the country’s eligible debt outstanding.
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