EMD Local Versus Hard Currency Bonds

Emerging market local currency bonds have many benefits over EM hard currency bonds. But iinvestors are not ignoring hard currency bonds at today's prices.

Oct 2022

Fixed Income

EMD Back On Investors Radar.

The default allocation to EMD tends towards local currency bonds. The market is larger than hard currency bonds, more liquid, and of higher quality. But are you getting paid for your risk today, and if so, where is the outperformance of local currency bonds coming from?

With 10 year treasury yields breaking 4% for the first time since 2007, and EM Sovereign Bond prices falling to levels not seen in 20 years, investors are taking another look at EM bond markets. The fixed income feed inside RFPnetworks was dominated last week by new papers dissecting the universe: The risks, the drivers of performance, and the outlook for EM Fixed Income markets versus developed markets.

Emerging Market Debt

The Case for Local Currency Emerging Markets Debt

Mondrian Investment Partners

Mondrian EMD research on RFPnetworks depicted by tranquil lake in Africa.

‍

An allocation to high-quality, developed market government bonds continues to play an important role in reducing the volatility of a well-diversified portfolio. However, there is no getting away from the fact that, despite recent rises, yields in developed country bond markets are low by historical standards and often fail to compensate even for relatively modest projections for inflation. Given the secular forces that have led to the long-term decline in equilibrium real interest rates, this situation is likely to persist. An allocation to Emerging Markets Debt (EMD) can complement traditional fixed income by enhancing long run returns and acting as an important diversifier within global portfolios.

Read Paper