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Emerging Market Local Debt: An Exception To The Rule

Mar. 07, 2018 1:25 PM ETELD
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By Kevin Flanagan

Thus far, calendar year 2018 has not been kind to the fixed income arena. Essentially, all of the major asset classes have registered negative returns to some degree, as of this writing. However, there is one exception to the rule: emerging market local debt (EMD).

Needless to say, the general rise in interest rates throughout the developed world has created a rather unfavorable landscape for the fixed income investor. Here in the U.S., the Treasury 10-Year yield has risen, at one point, in excess of 50 basis points (bps) year-to-date, the largest increase in the most closely watched government bond markets. In Europe, U.K. sovereign 10-year yields jumped up 46 bps at their high point, with the like-maturity German bund recording a 34-bps gain at its peak. In Canada, the 10-year government yield was up 33 bps.

2018 YTD Fixed Income Total Returns

Now, back to the EMD universe. As measured by the J.P. Morgan GBI-EM Global Diversified Composite Yield to Maturity Index, emerging market yields are actually down nearly 10 bps through the latter part of February. This divergence in rate patterns has helped to play an integral role behind the different performance stories. As the reader can clearly see in the accompanying chart, emerging market (EM) local debt is the only asset class that has thus far come in on the plus side of the ledger, year-to-date, posting a return of +4.2% (J.P. Morgan Government Bond Index - Emerging Markets Global Diversified Index). This is in stark contrast to the negative performances seen throughout the developed sovereign debt markets. For the record, the Bloomberg Barclays U.S. Aggregate Bond Index, better known as the Agg, has come in at -2.1%.

For investors looking to diversify their fixed income portfolio by utilizing an EM local debt slice, WisdomTree

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