With less central bank activity, we believe interest rates in emerging market government debt will remain near current levels in 2013. As of January 31, 2013, ELD had a yield to maturity of 4.59% and duration of 4.84 years. By comparison, the current Five-Year U.S. Treasury Note has a comparable duration of 4.8 years.2 While investors are exposed to foreign currency risk, we believe that these yield levels provide significant income potential from a portfolio that is currently comprised of 96% in investment-grade3 securities.
Another potential driver in 2013 could be returns from changes in currency. Since ELD’s inception,4 currency performance has actually had a negative impact on the Fund’s returns. However, we do not believe this will always be the case. Based on the Fund’s current exposures, the currencies in the Fund are down by 2.42% versus the U.S. dollar since inception.5 While we believe in the long-term prospects of EM currencies, appreciation will occur gradually. The rationale behind this belief is that as these countries continue to grow at faster rates than the U.S., there may be a bias for the currency to appreciate against the U.S. dollar. Eventually, as these countries transition from export-driven economies to more consumer-based ones, an appreciating currency will benefit as they import more products from abroad.
For investors seeking to increase their portfolio’s yield and gain exposure to a depreciating U.S. dollar, we believe emerging market local debt could continue to be an attractive asset class in 2013.
Rick Harper is head of fixed income and currency for WisdomTree Asset Management. This post was republished with permission from the WisdomTree blog.
1Bloomberg, December 31, 2012
2Bloomberg, January 31, 2013.
3Credit ratings based on the highest rating of Standard & Poor’s, Moody’s and Fitch.
4August 9, 2010.
5WisdomTree, Bloomberg, 2012.
