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  • Emerging Markets Bonds

    Commodities Rally an Uneven Tailwind for Emerging Markets Debt

    Fran Rodilosso, Head of Fixed Income ETF Portfolio Management, CFA
    February 22, 2018

    Commodity prices have been on a steady upswing since early 2016, rising over 40% through January 31, 2018.1 Many investors, assuming a tight link between commodity prices and emerging market local currency returns, fairly view broad emerging markets exposure as a way to play the recovery in commodities.

    What's Behind the Correlation?

    However, using oil prices as a point of reference, a wide dispersion is seen among individual currencies represented in the J.P. Morgan GBI-EM Global Core Index.

    Emerging Markets Currencies Have Varying Correlations to Oil Prices

    Chart showing varying correlation of emerging markets currencies to oil prices

    Source: Bloomberg. Monthly return correlation from 1/31/13 to 1/31/2018. Oil is measured by the first month WTI crude oil contract on the New York Mercantile Exchange. Past performance is not indicative of future results. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

    Currencies of oil exporters like Russia and Colombia have exhibited high correlations with oil prices over the past five years. The remaining 16 currencies generally experienced lower correlation, which is perhaps unsurprising given that over 60% of the index comprised net oil importers, as of January 31, 2018.2

    The overall moderate correlation of index returns with oil prices reflects the diversity of economies within the index. Despite rising commodity prices since 2016, the majority of emerging markets local currency bond returns over the past five years have been driven by local interest rates rather than currency appreciation.

    But overall, the emerging markets local currency bond index exhibits a positive correlation to commodity prices. A continuing commodities rally would likely provide support to emerging markets local currency bonds.