Emerging Market Junk Bonds Outperform in Sovereign Debt Markets

New Delhi, May 9, 2024 — In a surprising turn of events, emerging market junk bonds have emerged as top performers in sovereign debt markets. Investors seeking higher yields and diversification have flocked to these riskier assets, driving impressive returns.

Local-Currency Sovereign Bonds Shine

Local-currency emerging-market sovereign bonds have been the star of the show. As of November 22, 2023, they have returned a remarkable 7.4% year-to-date (YTD) in local currency terms. The appreciation of some emerging market currencies against the US dollar has further boosted their gains, resulting in an impressive 8.6% return in dollar terms.

Latin American sovereign bonds, in particular, have been on fire. They gained an astonishing 11.5% in local-currency terms and an eye-popping 22.4% in US dollar terms YTD. Falling headline inflation allowed central banks in Brazil, Peru, and Chile to cut rates, leading to lower sovereign yields. Meanwhile, central banks in Asia (except China) have taken a more cautious approach.

Hard-Currency Corporate Bonds Follow Suit

Hard-currency emerging-market corporate bonds have also seen a surge. These bonds, which offer attractive yields, have risen in value and performed in line with developed-market credit. As of November 24, 2023, they provided yields of around 7.7%. Investors should focus on high-quality issues when venturing into this asset class.

High-Yield Emerging-Markets Bonds (HYEM)

HYEM, a high-yield bond index tracking emerging markets, has been a standout performer. For the 12 months ending July 26, 2024, it returned an impressive 12.4%, outpacing the Markit iBoxx USD Liquid High Yield Index, which gained only 3.9%. Notably, HYEM has been 110 basis points less volatile than its domestic junk bond counterpart.

Investor Considerations

While the allure of higher yields is tempting, investors must tread carefully. Emerging market bonds carry risks, including currency fluctuations, political instability, and liquidity challenges. Diversification remains key, and a balanced portfolio that includes both developed-market and emerging-market bonds can help mitigate risks.

As we move into the second half of 2024, keep an eye on these dynamic markets. The performance of emerging market junk bonds will continue to be closely watched by investors worldwide.

References:

1. Bloomberg: “Emerging-Market Bonds Are Having a Banner Year”

2. Barron’s: “Emerging-Market Bonds Are Back in Favor. Here’s Why.”

2of30