The Bottom Line
- Emerging Market (EM) currencies and debt have had a rough few weeks. Argentina, Brazil, Mexico, South Africa and Turkey have all seen their currencies plummet based on a host of local concerns – i.e. political stability, central bank independence, the threat of impending tariffs, or the belief that the country’s foreign exchange reserves were too small to allow it to effectively defend its own currency.
- One result: aggregate EM bond returns have sagged. Year to date, U.S. dollar-denominated EM bonds have declined -3.57% and high-yield dollar-denominated bonds fell -4.22%; local-currency government bond returns fell -3.14%.
- But those declines, along with policies designed to shore up their currencies, have resulted in rising yields – now strong enough to attract the attention of investors with global charters, unconstrained investment mandates and seekers of absolute (rather than relative return).
- For five-year maturities, those yields include 6.92% for Russia, 8.116% for South Africa, 10.846% for Brazil, 15.270% for Turkey and 21.721% for Argentina.
- In the ten years ended June 2018, there have been five major spikes in 10-day volatility of U.S. dollar-denominated EM yields, each related to crises in global finance. But over the long-term, the median volatility is low enough for many investors to tolerate some nervous moments.
- Surprisingly, that long-term volatility is lower, rather than higher, for local-currency EM bonds. U.S. dollar EM bonds, over the ten years ended June 6, 2018, showed a median volatility of 7.84 over the period. But local-currency EM bonds came in at a median of 6.01. That’s despite the higher peak volatility for local-currency bonds of 72.71 on September 30, 2009, vs. the peak of 64.85 on November 3, 2008.
- The bottom line: with yields high enough to merit attention from active investors, EM bonds, whether denominated in U.S. dollars or local currencies, can be worth the time needed to understand the risks they represent – especially in times of financial disruption.
All data Source: Bloomberg, June 7, 2018.
The Barclays EM U.S. Dollar Aggregate Bond Index includes dollar-denominated debt from sovereign, quasi-sovereign, and corporate EM issuers.