EM Debt Update: September Resets Valuations
September was a challenging month for emerging market (EM) bonds, and the benchmark JP Morgan EMBI Global Index (EMBI) declined 2.41%. Returns were hindered by weaker-than-expected economic data from China and Europe, investors’ reduced appetite for global risk, concerns surrounding Brazil’s upcoming presidential election, and a back-up in U.S Treasury yields (the 10-year U.S. Treasury yield increased by 15 bps, closing the month at 2.49%). Year to date, sector returns remain positive, with the EMBI up 7.30%.
Returns for EM Debt vs. Other Asset Classes (as of 9/30/14)
|JPM EMBI Global Index||-2.41%||7.30%|
|U.S. 10-year Treasury||-1.23%||6.89%|
|JPM Investment Grade Index (Ex EM)||-1.34%||5.79%|
|JPM Domestic High Yield Index||-2.11%||3.74%|
|S&P 500® Index||-1.55%||6.70%|
The overall yield on the JP Morgan EMBI Global Index was 5.76% at September 30, or 34 bps lower than at year-end 2013. The index credit spread tightened 5 bps year to date, with the remainder of the drop in yields due to the compression in U.S. Treasury yields. For example, the 10-year Treasury yield has dropped from 3% at year-end 2013 to 2.49% at September 30.
Index spreads are wider than the 5-year long-term average (see chart below), and in our view, offer some value given the benign credit environment and ample global liquidity provided by developed market central banks. The new issue market has been relatively muted in recent weeks while flows remain modestly positive, providing a supportive technical backdrop.
JPMorgan EMBI Global Index Spreads, Five Years (as of 10/3/14)
Top and Bottom Country Index Returns, JPM EMBI Global Index (YTD as of 9/30/14)
Both EM corporate debt and local markets have trailed EM sovereign market returns year to date, reflecting shorter duration in the case of the corporate index, as well the absence of exposure within the corporate index to some of the top performing countries. Local market index returns have lagged due to weakening fundamentals relative to the U.S. and/or heightened geopolitical risk in some of the larger issuers including Russia (-18.5% YTD).
EM Sovereign, Corporate, and Local Returns (YTD as of 9/30/14)
|JPM EMBI Global Index (Sovereign)||-2.41%||7.30%|
|JPM CEMBI Broad Index (Corporate)||-0.99%||5.91%|
|GBI EM Global Diversified Index (Local Currency)||-5.11%||-0.01%|