Investors eye up EM bonds

While public debt in the rich world rockets (see page 4), developing countries responded to Covid with more “conventional” policies, says Peter Warburton in the Halkin Letter. Emerging markets (EMs) ran a tight fiscal ship and raised interest rates when inflation emerged, helping them to retain market confidence. The result? EM bonds have outperformed G7 government bonds by an impressive 38% in US dollar terms.

Debt issued by the likes of China, Mexico and India pays a higher yield than that issued by developed economies because of the greater perceived risk of inflation or default. Yet that extra yield, or “spread”, over US Treasury bonds has fallen from an average of 4.6% five months ago to 3.4%, close to a post-Covid low, Sergey Goncharov of Vontobel Asset Management tells Barron’s. Yields move inversely to prices, so falling yields mean gains for existing bondholders.

The arrival of reforming presidents in Argentina and Ecuador have made these countries’ bonds “unlikely fixed-income stars” this year, with returns of “up to 80%”. Yet the core of the case for EM bonds is not such high-risk political bets, says Craig Mellow in Barron’s. It is the fact that many pay a decent fixed income while being far stabler and better managed than in the past. Bond market “pros” are looking at “solid credits from the likes of Mexico, Indonesia, and Saudi Arabia”.