EM Bonds: Historic Opportunity?

Written by: Global Thought Leadership | February 28, 2019

Chart courtesy of Western Asset. Source: Bloomberg, as of 12/31/2018. Please see below for definition of the index.  Past performance is no guarantee of future results.  Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

 

THE BOTTOM LINE

  • Investors in EM bonds had a difficult 2018 – hurt by higher U.S. interest rates, a strong U.S. dollar; questions about the pace of global growth, especially in China; falling commodity prices; and global trade tensions. Indeed, as of the end of 2018, EM bonds were touching18-year lows in terms of price.
  • But in Western Asset's most recent market outlook, CIO Ken Leech points out that many negative factors have been shifting to neutral – yet prices for EM bonds have yet to reflect improving conditions.
  • Of particular importance are the Fed's newly dovish stance toward rates, the potential for an interim cease-fire on trade between the U.S. and China, and the potential emergence of a consensus delaying the onset of Brexit.
  • For Western Asset, the single most significant factor is the persistence of low inflation across the globe. That gives many EM central banks the leeway to cut benchmark rates, to the potential benefit of both local- and hard-currency bondholders.
  • This is not to suggest that the long rout in EM bonds wasn't based on fundamental issues, at least in part.  But with conditions beginning to turn, there is potential for opportunity.

All data Source:  Bloomberg, as of Feb 28, 2019 unless otherwise indicated.

 

Definitions:

The J.P. Morgan Global Bond Index - Emerging Market Global Diversified Index is a global index for diversified Emerging Market (EM) bonds.

Emerging markets (EM) are nations with social or business activity in the process of rapid growth and industrialization. These nations are sometimes also referred to as developing or less developed countries.

 

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