The Differentiated Appeal Of EM Debt

A tale of different EMs

Emerging market local debt vs. U.S. Treasuries total returns, 2022

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and not subject to fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv, April 2022. Notes: The chart shows the total returns for emerging market local-currency bonds compared with U.S. Treasury bonds based on the JP Morgan GBI-EM Global Diversified and regional (LatAm and Europe) indexes and Bloomberg U.S. Treasury USD index.

It’s been an annus horribilis for bonds everywhere this year – except in some corners of the emerging world. Why? Scarcity inflation has arrived. Supply shocks have created shortages of goods, energy and food that are driving up prices. This has spurred DM central banks to signal faster policy normalization than markets expected and resulted in bond yields rocketing upward. Local-currency EM debt (the red line in the chart) has suffered alongside U.S. Treasuries (green line) so far this year. It’s key to realize broad EM indexes hide a lot of differentiation. Local-currency debt of commodities producers such as Latin America (yellow line) and the Middle East & Africa have actually posted gains this year, outperforming debt of commodities-consuming Asia and Europe (purple line). The latter was directly hit by the fall-out of Russia’s invasion of Ukraine.