What a difference a year (and change) makes. Emerging market debt’s (EMD) yield spreads to comparable Treasuries are more attractive than they have been since 2016. The Bloomberg Barclays Emerging Markets Sovereign Index currently yields almost 6.2%, its highest level since early 2016, and the spread to comparable Treasuries has also climbed to mid-2016 levels near 3.1%, as our LPL Chart of the Day shows.
“Although EMD valuations appear more attractive than they have in some time, the potential for additional dollar momentum, rising rates, and trade disruptions remain headwinds for the asset class,” cautioned LPL Research Chief Investment Strategist John Lynch.
While rising U.S. yields and a stronger dollar contributed to recent EMD weakness broadly, disparities in political, economic, and fiscal situations among emerging market countries can lead to large dispersions in performance. “For appropriate investors who could ride out additional volatility and want to take advantage of recent weakness, consider employing active strategies given the wide disparity among the economic situations of individual countries under the EMD umbrella,” Lynch explained.
Interested in more EMD considerations? Read our Bond Market Perspectives.
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Option-adjusted spreads (OAS) represent the difference between the index yield and the yield of a comparable maturity Treasury. The OAS can be used to measure the risk levels markets are placing on high-yield bonds. As spreads widen, investors demand a higher yield relative to lower-risk Treasuries, meaning risk levels have increased.
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