“EM corporates presently trade at a yield premium to B-rated U.S. corporates. Prior to last year’s sell-off, yields for EM corporates have historically traded more in line with Ba-rated credits. Yields for Ba corporates as of 5/31/2014 are 4.16%, a full 115 basis points lower than CEMBI. The wider spreads are representative of more attractive valuations in EM corporates,” said WisdomTree in a recent research note.
Just over a quarter of this year’s newly issued emerging markets corporates have been junk-rated compared to a usual rate of 33%, according to Reuters.
That could be a sign that while investors like the yield advantage of developing world corporates, they are only willing to reach so far to get it.
About 81% of the SPDR Merrill Lynch Emerging Markets Corporate Bond ETF’s (NYSEArca: EMCD) weight is rated A or Baa. EMCD is heavy on Latin American corporate debt as Brazil and Mexico combine for 34% of the fund’s weight.
Some market participants believe Brazilian sovereigns are attractively valued while some have also noted that on a yield basis, Brazilian corporates are inexpensive compared to U.S. equivalents. EMCD has a 30-day SEC yield of 3.72% and a modified adjusted duration of 5.94 years. [Pimco Sees Value in Brazilian Bonds]
WisdomTree Emerging Markets Corporate Bond Fund
Tom Lydon’s clients own shares of EEM and EMB.