Fixed Income

EMD Relative weekly notes

Week Ending September 7, 2018

09/10/2018

James Barrineau

James Barrineau

Head of Emerging Markets Debt Relative

Late 2015 redux
We are approaching—though we are not quite there yet—peak stress levels across EM that were last seen in late 2015.

Figure 1 shows the steep rise in the difference between investment grade and high yield in EMD, which is now about 40 basis points below the peaks of 2014 and late 2015 (as the dollar made its steep ascent).

Figure 1
Source: JPMorgan and Bloomberg; as of September 5, 2018. JPGCHYBY is the JPMorgan EMBI Global Diversified High Yield Blended Index. JPGCIGBY is the JPMorgan EMBI Global Diversified IG Blended Yield Index. Past performance is not a guarantee of future results.


Figure 2 shows what we think is the most unusual feature of this episode of EM nerves—dollar yields have done far poorer than local currency yields. The current spread of a tiny 8 basis points is far below the 100 basis point historical average, and at a level not seen since the Global Financial Crisis.

Figure 2

Source: JPMorgan and Bloomberg; as of September 5, 2018. JGENVHYG is the JPMorgan GBI-EM Global Diversified Composite Yield to Maturity. JPGCBLYD is the JPMorgan EMBI Global Diversified Blended Yield. Past performance is not a guarantee of future results.

The good news for investors is that one need not take on currency risk and volatility to capture any potential future mean reversion returns, but rather simply avoid default risk. We believe it is at times like these that EM, with historical default rates of under 4%, embodies the behavioral finance maxim that markets consistently over-price worst case scenarios.

 

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.