EM Debt Update - Another Strong Month of Returns


Emerging market (EM) sovereign debt returns were very strong in May, with the JP Morgan EMBI Global Index returning 3.20% for the month. The index is now up 8.45% year to date, with just over half (4.25%) of total return coming from 35 basis points (bps) of spread tightening and the remainder of return from lower U.S. Treasury yields. Overall yield on the JP Morgan EMBI Global Index closed the month of May at 5.33%, or 77 bps lower than the year-end 2013 level. After a record month of corporate issuance in April, the pace of EM debt supply eased somewhat in May and combined with continued positive retail fund flows to provide a supportive technical backdrop.

How Do EM Returns Stack Up Vis-À-Vis Other Asset Classes?

As of May 30, 2014 MTD YTD
JPM EMBI Global Index 3.20% 8.45%
U.S. 10-Year Treasury 2.09% 6.44%
JPM Investment Grade Index (Ex EM) 1.34% 5.64%
JPM High Yield Domestic 0.93% 4.92%
S&P 500® 2.10%  4.07%

While we do not long or short the CBOE Volatility Index ( “VIX”), it is interesting to note that the index ended the month at 11.40 and was down in May, year to date, and for the last 12 months, -14.99%, -16.9%,
and -21.54% respectively. The index is now at 5-year low levels, and well below the 5-year average of 19.88.

During May, EMBI Global spreads were tighter by 23 bps at the index level, contributing 59% of the monthly total return, and ended the month at +293 bps on the index. Investment grade sovereign bonds led by Russia were up 3.34%% compared to high yield returns of 2.82%. Russian debt performance reflected the shift to a softer tone with regard to the Ukrainian situation by President Putin during the month. While the situation remains fluid, our base case is that it will stabilize and a major tail risk event will be avoided.

JP Morgan EMBI Global Index Country Returns for May

Top 5 Countries
Ukraine +11.1%
Russia +6.52%
Iraq +6.44%
Mongolia +5.34%
Morocco +5.24%

Bottom 5 Countries
Argentina -1.62%
Ecuador +0.23%
Trinidad & Tobago +0.52%
Vietnam +0.62%
Jordan +0.85%

EM local markets and corporate debt markets continued to lag sovereign returns in May, reflecting shorter duration and continued investor caution with regard to local currency denominated debt due to still-weakening fundamentals in some of the larger emerging market economies including China and Brazil.

As of May 30, 2014 MTD YTD
EMBI Global (Sovereign)  3.20% 8.45%
CEMBI Broad (Corporate) 2.41%  5.50%
GBI EM Global Diversified (Local)  2.08% 4.94%

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.