Financial Professionals


EM Debt Summer Moderation, Still Strong YTD


As Labor Day draws near, returns for emerging market (EM) sovereign debt have eased in the late summer but remain positive, with August’s pace ahead of July. Year-to-date returns are still strong with the JP Morgan EMBI Global Index, a benchmark for the EM sovereign debt market, up 9.53% (through 8/20).

EM Debt Returns vs. Other Asset Classes (as of 8/20)

JPM EMBI Global Index +0.12% +0.28% +9.53%
U.S. 10-Year Treasury -0.13% +1.36% +7.41%
JPM Investment Grade Index (Ex EM) -0.09% +0.68% +6.39%
JPM Domestic High Yield Index -1.26% +1.28% +5.74%
S&P 500® Index  -1.51% +2.89% +7.47%

Overall yield for the EM debt market, as measured by the JPM EMBI Global Index, was 5.39% at 8/20, or 71 basis points lower than the year-end 2013 yield. The index credit spread has tightened 21 bps year to date, while the remainder of the decline in yields is due to the compression in U.S. Treasury yields, as the yield on the 10-year note recently dropped to 2.40% from 3% at the end of last year.

EM debt spreads (relative to U.S. Treasuries) are currently at 306 bps and on the tighter side of long-term averages (see chart below), but have some scope to tighten given the benign credit environment and ample global liquidity provided by central banks in the developed markets.

JPMorgan EMBI Global Index Spreads, Five Years (as of 8/20/14)

Source: Bloomberg

In terms of new debt issuance, the EM debt market has been very active year to date with $255 billion in issuance from the corporate sector alone. However, with 75% to 80% of full-year forecast supply levels already issued, we expect supply technical factors to be favorable for the remainder of the year. Retail and institutional fund flows continue to be positive and provide additional support for EM debt prices.

Top and Bottom Country Returns, JPM EMBI Global Index (YTD as of 8/20)
Top 5
Belize                                      +21.33%
Honduras                                +18.66%
Jamaica                                  +17.58%
Ivory Coast (Cote D’Ivoire)     +17.38%
Zambia                                    +16.57%

Bottom 5
Russia                                     +1.00%
Bulgaria                                   +1.68%
Jordan                                     +3.57%
Latvia                                      +4.80%
Ukraine                                   +5.52%

Both local-currency-denominated EM debt and EM corporate debt lagged EM sovereign debt returns year to date, reflecting shorter duration in the case of the corporate EM debt benchmark, JPM CEMBI Broad Index, as well as a lack of index exposure to some top-performing countries. Local-currency EM debt returns, as measured by the JPM EM Global Diversified Index, have lagged due to weakening fundamentals and/or heightened geopolitical risk in some of the larger issuers such as Russia where local currency debt is down 11% year to date (as of 8/20).

EM Sovereign, Corporate, and Local Returns (YTD as of 8/20)

JPM EMBI Global Index (Sovereign)                         9.53%
JPM CEMBI Broad Index (Corporate)                       7.58%            
GBI EM Global Diversified Index (Local Currency)   4.79%

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.