EM Early to Tightening Party
June 23, 2022
Read Time 1 MIN
As we explained in our April update, we believe that weaker growth is still not fully priced into the market. Since then, our stance has not changed. While higher policy rates were largely priced into the 2-year Treasury, which is at 5-year highs, the 30-year Treasury is not quite there yet. Consequently, the Fund is looking to increase its low-beta duration and further reduce its exposure to emerging markets foreign currency.
Emerging markets (EM) central banks have pre-empted Fed hikes. They are normally more hawkish, but in this latest episode they are also more pre-emptive. They entered the Russia/Ukraine crisis having already tightened monetary policy. However, growth risks abound, including China’s political incentives that may trump economic incentives, adding to slowdown risks.
Year-to-date, the Emerging Markets Bond Fund (the “Fund”) outperformed its benchmark due to the Fund’s very low duration and not holding Russian assets. For detailed Fund performance and EM debt outlook, download the commentary.
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Duration measures a bond’s sensitivity to interest rate changes that reflects the change in a bond’s price given a change in yield. This duration measure is appropriate for bonds with embedded options. Quantitative Easing by a central bank increases the money supply engaging in open market operations in an effort to promote increased lending and liquidity. Monetary Easing is an economic tool employed by a central bank to reduce interest rates and increase money supply in an effort to stimulate economic activity. Correlation is a statistical measure of how two variables move in relation to one other. Liquidity Illusion refers to the effect that an independent variable might have in the liquidity of a security as such variable fluctuates overtime. A Holdouts Issue in the fixed income asset class occurs when a bond issuing country or entity is in default or at the brink of default, and launches an exchange offer in an attempt to restructure its debt held by existing bond holding investors. Carry is the benefit or cost for owning an asset.
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November 22, 2022
While China was the biggest detractor in October, we believe our decision to retain our country holdings will prove prescient as China begins reopening.
November 17, 2022
Compared to the U.S. and other developed markets bonds, EM bonds not only provide significantly higher nominal and real yields on average but also shorter durations.
October 31, 2022
Coming out of the Fall 2022 IMF meetings, investor reactions were overwhelmingly dominated by US rates and geopolitics.
October 21, 2022
While the Fund underperformed its benchmark in September, it continues to outperform its benchmark year-to-date, in part, due to active management of duration and EMFX.