Supportive Tailwinds for EM Debt
September 21, 2022
Read Time 2 MIN
The U.S. Federal Reserve (Fed) looks set to keep rates higher for longer than the market expected, and the European Central Bank (ECB) is only now jumping on that bandwagon with a new hawkish tilt. The best thing going for September seems to be how bearish so many are on risk. Emerging markets (EM) sovereign high yield (HY) spreads are at crisis highs (i.e., GFC, Covid crises), with strong fundamentals and as we have stated numerous times, EM hiked earlier and larger than any of the developed markets (DM). Thus, we see mostly sunny EM skies around DM clouds.
The Emerging Markets Bond Fund (the “Fund”) was up 1.47% in August, compared to a loss of 0.53% for its benchmark. August’s 200bp of outperformance brings YTD outperformance to 642bp. Year–to–date, owning no Russia, navigating Ukraine and not keeping our duration view on “autopilot” drove performance. The Fund’s outperformance in August was due primarily to China, where our view that property–sector (and other) bonds were majorly oversold and underpriced finally paid off. 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.