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Macro

Can emerging market yields tempt developed market investors?

Although developed market bond yields are hovering around the 1% mark and are even pushing into negative territory for some countries’ sovereign bonds, there is unlikely to be an uptake in better yielding emerging market debt from DM investors. Nevertheless, EM assets do constitute part of global high yield and global investment grade portfolios.

Jun 20, 2016 // 5:08PM

According to the Bloomberg Global Sovereign Bond Index, the effective yield of US Treasury bills stands at 1.22%.

Although this is relatively high in comparison to Germany’s Sovereign Bond Index which currently offers -0.23%, it is still significantly lower than Bloomberg’s USD Emerging Market Sovereign Bond Index which carries an effective yield nearly 4 times higher at 4.84%.

Corporate indices perform similarly to their sovereign counterparts. Bloomberg’s US Corporate Bond Index has an effective yield of 2.98%, noticeably lower than its USD Emerging Market Corporate Bond Index, which has an effective yield of 5.50%.

However, despite the significantly lower returns that are on offer amongst DM fixed income when compared to their emerging counterparts, DM investors seem to be sticking with their asset class.

“As our investments are client and mandate driven, there is not much appetite for EM debt,” said Akin Akinloye, Partner at Cheyne Capital.

Although there are sub-investment grade assets across DMs, just like investment grade assets within the EM world, investors who focus on developed economies are unlikely to opt for the EM alternative.

Sub-investment assets are those carrying a credit rating of BBB- or lower by S&P Global Ratings and Fitch, and Baa3 or lower by Moody’s.

Akinloye noted that there are different risks associated with DM and EM assets, and as a result it would be unlikely that there would be any crossover.

However, certain funds do hold both EM and DM assets.

Rob Orman, Senior Analyst, Fixed Income at Henderson Global Investors stated that global high yield and global investment grade portfolios usually have an EM component, adding that he has exposure to investment grade EM and high yield credit.

Macro

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