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Positive Returns Continue for EM Debt

07/09/2014

Emerging market (EM) sovereign debt returns continued to be positive in June, with the JP Morgan EMBI Global Index returning 0.59% for the month. The index is now up 9.10% year to date (5.43% for 2Q), with returns coming from a combination of spread tightening and lower U.S. Treasury yields. Overall yield on the JP Morgan EMBI Global Index closed the month of June at 5.31%, or 79 bps (0.79%) lower than the year-end 2013 level. The market for EM debt issuers remains open, yet despite robust new issuance, the need to reinvest coupons and amortizations and the resumption of positive flows to EM retail funds continues to provide a supportive technical backdrop.

EM Debt Returns vs. Other Asset Classes, as of June 30, 2014
 
MTD
YTD
JP Morgan EMBI Global Index
0.59%
9.10%
U.S. 10-Year Treasury
-0.32%
6.10%
JP Morgan Investment Grade Index (Ex EM)
0.13%
5.77%
JP Morgan High Yield Domestic
0.80%
5.76%
S&P 500®
1.91%
6.05%

During June, EMBI Global spreads were tighter by 8 bps (0.08%) at the index level and ended the month at +285 bps (+2.85%) on the index. Sovereign returns were generated entirely from the high yield sub-segment with 2.27% for the month, while the investment grade lagged at -0.04%.

Among EM countries, Argentina led gains for the month, up 8.98%, as it looked as though continued progress was being made in normalizing relations with international creditors. We have seen some volatility return to Argentine assets more recently on the back of the U.S. Supreme Court’s decision not to hear pending litigation. We expect a negotiated solution with holdout creditors to be reached.

Top and Bottom Country Returns, JP Morgan EMBI Global Index

Top 5
Argentina                     +8.98%
Venezuela                   +5.56%
Zambia                        +2.64%
Ukraine                       +2.64%
Jamaica                      +1.85%

Bottom 5
Iraq                              -5.19%
Guatemala                  -2.44%
Mongolia                     -2.31%
Philippines                   -1.33%
S. Africa                      -1.20%

Both EM local markets and corporate debt markets played catch-up in June, reversing some of the year’s underperformance.

 
June
YTD
JPM EMBI Global Index (Sovereign)
0.59%
9.10%
JPM CEMBI Broad (Corporate)
0.70%
6.25%
GBI EM Global Diversified (Local)
0.96%
5.35%

Data Sources: EM mutual fund flows: EPFR Global; All other data: JP Morgan.

Past performance is not a guarantee of future results.

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.