Economics

EMD Relative weekly notes

Week Ending October 26, 2018

30/10/2018

James Barrineau

James Barrineau

Head of Emerging Markets Debt Relative

Four key points

  •  Absolute yields on US dollar emerging sovereign debt are now at the highs of the peak stress period of early 2016
  •  Those yields, at just over 6.7%, are now consistent with a reasonable, long-run equity return expectations, in our view
  •  Return expectations should be lower than index yields if one presumes inflation rises more sharply—however, break-even inflation rates recently fell to the lowest since January—suggesting markets do not currently have that concern
  •  Alternatively, returns could potentially be higher if the dollar fell as markets anticipated slower US growth and equity returns bring forward the end of the Fed hiking cycle

Figure 1 below shows absolute yields for the JPMorgan EMBIG sovereign dollar index over the past five years.

Source: Bloomberg and JPMorgan, as of October 26, 2018. Data is the JPMorgan EMBI Global Index yield (JPGCBLYD). Past performance is not a guarantee of future results. Actual results would vary.