US rates are rising: what’s next for emerging market bonds?

Blended approach to emerging market bonds most resilient to US rate rises

For years, fixed-income investors have used emerging market (EM) bonds to diversify their portfolios and lift yields. From 1 January 2008 to 31 December 2017, for example, hard-currency EM bonds returned an average 7.29% per annum, while local-currency EM bonds produced on average 3.69% each year – in USD terms –, much higher than the returns on developed-market bonds. Over that same timeframe, 10-year US Treasury yields fell from around 3.60% in early 2008 to historical lows in 2016.

However, US rates are now on the increase, and many investors wonder if EM bonds can hold their own. To answer that question, we analysed the available data on how a range of EM debt responds to US interest- rate rises, looked into the reasons why some EM bonds are less closely tied to US rates than in the past, and tested an active portfolio that includes a blend of hard and local currency government debt and corporate bonds.

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