Stratifying Opportunities across Credit Ratings
In seeking to further refine our assessment of potential opportunities in emerging market fixed income, we sought to graph opportunities in U.S. corporate bonds yields according solely to their credit ratings.9 While this analysis gives a high degree of discretion to credit rating agencies, we believe this analysis meaningfully highlights the dramatic transformation we have seen in markets over the past year. In April 2013, U.S. CCC-rated corporate bonds yielded 190 bps more than EM local debt. At the end of April 2014, EM local sovereign debt offered an additional 9 bps in yield compared to CCC-rated corporate borrowers, a shift of nearly 200 bps. Prior to 2014, local debt had never offered, even during the depths of the financial crisis, more yield than CCC-rated corporates in the history of the J.P. Morgan GBI-EM Global Diversified Index.10
Conducting this same analysis for EM corporates, this EM asset class now yields over 110 bps more than B-rated credits in the U.S. In April 2013, the premium was only 20 bps, and at the start of 2013, B-rated high-yield debt actually provided higher absolute yields. Again, the key takeaway from the chart below is that across virtually every measure of relative value, EM debt currently provides a compelling pickup in income potential compared to lower-rated U.S. corporate debt. Additionally, while yields have continued to fall since August 2013 in the U.S., yields of emerging market fixed income have continued to climb over the last six months, potentially creating attractive relative value opportunities.
EM Locals Trading Like CCC-Rated Corporates, EM Corporates Wider Than B-Rated Corporates
For definitions of terms and indexes in the chart, please visit our Glossary.
Conclusion
While emerging market investing entails a potentially different risk profile compared to U.S. corporate debt, we believe that when investors are looking globally for income in their portfolios, all asset classes should be on the table. In the current market environment, we believe that emerging market fixed income is priced attractively compared to other risky fixed income sectors. Compared to last year, valuations suggest a greater resiliency to weather a potential rise in global interest rates. In our view, fundamentals suggest a potential margin for error as well.
1Emerging market local debt is proxied by the J.P. Morgan GBI-EM Global Diversified. EM corporate debt is proxied by the JPMorgan CEMBI Broad. All data as of 4/30/14 unless otherwise noted
2Source: JP Morgan
3Sources: JP Morgan, Bloomberg
4As represented by Barclays High Yield
5Source: JP Morgan
6Source: JP Morgan. As of 4/30/14, the J.P. Morgan GBI-EM Global Diversified Index was 93% investment grade
7Source: JP Morgan
8Sources: Barclays, WisdomTree
9Analysis was completed by using the Barclays indices for each credit rating
10Source: JP Morgan. Real-time history of the index begins in December 2006
Important Risks Related to this Article
Investments in emerging, offshore or frontier markets are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation and intervention or political developments.
Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty.
Fixed income investments are subject to interest rate risk; their value will normally decline as interest rates rise. In addition, when interest rates fall, income may decline. Fixed income investments are also subject to credit risk, the risk that the issuer of a bond will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline.