Emerging market debt: All about the yield

Challenges for the asset class, in the form of unexpected election outcomes and volatility in US rates, have given way to relative calm in the second quarter.

The past: what just happened?
Persistent outflows, unexpected election outcomes in several countries, and volatility in US rates have all represented headwinds for emerging market (EM) debt. However, tighter spreads, except in Venezuela, and a recent rally in US Treasuries following the sell-off in April, contributed to positive total returns for the asset class across sovereigns and corporates this year. This rally in rates means that EM investment grade (IG) returns turned a corner in the second quarter and are flat for the year.

The high yield (HY) segment within EM has been the clear outperformer this year. The high yield sovereign index has seen gains of approximately 5.7%, while the high yield corporate index has risen by around 6.2%. This outperformance is attributed to factors such as lower sensitivity to rates volatility compared to investment grade bonds, positive idiosyncratic developments in selected credits and stable macroeconomic fundamentals.