Emerging market (EM) bonds have been one beneficiary of today’s low yield environment.
As investors casted a wider net for income, flows into emerging market bond exchange traded products (ETPs) doubled from 2011 to about $6 bn last year. Meanwhile, yields on local currency bonds issued by emerging market governments are now at 5.9%, down from 6.8% last March.
But now, after emerging market bonds’ rally, is it too late to allocate to this asset class? In my new Market Perspectives piece, I share three reasons why I believe emerging market debt is still worth considering:
- EM debt adoption. While most investors have embraced emerging market equities, they have been slower to adopt emerging market bonds, meaning the market isn’t yet overcrowded. Among institutional investors, ownership of emerging market debt is still extremely low. The largest defined benefit plans, for instance, have allocations to international debt in general of around 2%, and among retail investors, current allocations to emerging market debt are negligible. In addition, last year’s flows into emerging market bond ETPs made up just a small amount of the roughly $57bn total flows into fixed income ETPs.
- EM vs. DM fundamentals. Compared to developed markets (DM), emerging markets are experiencing faster growth and by many measures – particularly fiscal – greater macroeconomic stability. In fact, the big story in emerging market debt is an improvement in credit quality – both in an absolute sense and relative to developed market issues. Over the past two decades, many emerging market countries have made significant improvements to their fiscal positions and can now boast more pristine balance sheets than most developed markets.
- EM vs. DM yields. EM debt generally now offers higher yields than developed market bonds. And while emerging market debt yields have dropped in recent years, the size of
