Notes from the Desk: Dollar Tumbles, EM Debt Rumbles
January 29, 2018 By Sage Advisory
Fear and loathing of fixed income markets is standard protocol when monetary policy is in tightening mode. However, pervasive despair can cause one to overlook opportunities. EM debt has been one of those opportunities.
In the current environment, emerging market government bonds offer an attractive yield versus sovereign debt from various developed market countries. Figure 1 highlights the yield available on 10Yr government debt from a sample of countries in JP Morgan’s Emerging Market Government Bond Index. The average yield on these countries trades near 6.75%.
Another layer of support for EM debt comes in the form of a softening Dollar. The US Dollar Index has been weakening against most major currencies since 2016. EM debt performs well with a weakening Dollar and for USD based investors, the currency adjustment adds to returns. This year, the Dollar traded through a long term technical support level clearing the path for further weakness.
All told, EM Debt performance has been nothing short of outstanding since mid-2017. The JPM Emerging Markets Government Bond Index had an annualized return of 8.20% in the second half of 2017 and continues to perform in the early days of 2018. With strong global economic growth and a still abundant global capital pool, EM debt remains an attractive opportunity.
*Source: Bloomberg, JPM Bond Indices
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