More Bang for Your… EM Local Currency?

June 29, 2023

This chart description is for illustrative purposes only and its accuracy cannot be guaranteed. Please see full disclosures at end of PDF document in the web post. General description: Two-line chart comparing yield for JPM GBI-EM Global Diversified Index with the U.S. 10-Year. Chart subtitle: EM local yields remain at elevated levels relative to their history. Chart source: J.P. Morgan, Bloomberg as of June 26, 2023. Chart visual description: Y-axis is labeled “Yield” and ranges from 0% to 10% in 1% increments. X-axis is labeled annually, from June 2005 through June 2023. Slate line plots JPM GBI-EM Global Diversified Index and light blue line plots U.S. 10-Year. Chart data description: Yields for both indices move generally parallel, though the emerging markets index is typically at about 2% points higher than the U.S. 10-Year. Most recent data point: EM at 6.28% and U.S. 10-Year is at 3.72%. Please contact us for the full data set. End chart description. See disclosures at end of document.

Local currency emerging markets debt has been one of the standout fixed income asset classes this year. The J.P. Morgan GBI-EM Global Diversified Index — which tracks local currency bonds issued by emerging market governments — is up nearly 5% year-to-date.¹ This compares with the Bloomberg US Agg up 2.5% over the same period. Yields for the emerging markets index peaked in the fourth quarter of 2022 and remain near multi-year highs. Local currency EM debt could stand to benefit for three reasons: higher starting yields, proactive emerging markets central banks, and emerging versus developed GDP growth differentials.

Real yields in EM local currency debt are at attractive levels relative to history as well as relative to developed markets. As of June 26, GBI-EM yields were 6.28%. This compares with the U.S. 10-year Treasury yield at 3.72%. This yield differential compensates investors for the higher risk and positions them to benefit from yield compression if global macro headwinds start to abate.
Several EM countries such as Brazil and Mexico began their rate hiking cycles much sooner than their developed market counterparts. To the extent that positions these emerging central banks to cut policy rates sooner than the rest of the world, yield compression could benefit total asset class returns.
EM local currency debt should benefit from higher GDP growth than is expected in developed markets. Based on projections from the International Monetary Fund, EM economies are projected to grow approximately 4% per annum through 2024. This compares to advanced economies, where real GDP is projected to grow roughly 1.5% through 2024.

In sum, a number of tailwinds could continue to position EM local currency debt for strong relative returns as the year progresses.

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¹Through June 26, 2023