Fixed Income

EMD Relative weekly notes

Week Ending October 26, 2018

10/30/2018

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.

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.