Lack of yield in government bonds got you down? Consider local-currency EM debt


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By Emerging Markets Debt TeamEaton Vance Management

Boston - For investors trying to find yield in government bond markets, especially in developed markets, life isn't getting any easier. It has been 10 years since the end of the financial crisis and into the global economic recovery, and there is still more than $12 trillion worth of government debt trading at negative yields, including in the eurozone, Switzerland and Japan.

Even in the U.S., 5-year Treasury yields are negative when deflated by inflation expectations. The situation is not likely to change any time soon. Around the globe, many central banks, including the U.S. Federal Reserve and the European Central Bank, are contemplating looser monetary policy in light of weaker global growth and low inflation.

Against this backdrop, emerging-markets (EM) local-currency debt offers opportunity, even after the recent rally in yields. The chart below shows that the real yield spread of EM local-currency government bonds over G3 (U.S., Germany, Japan) bonds, as of June 12, was 193 bps. Local-currency EM debt carries currency risk but minimal credit risk compared to hard-currency EM debt.

Real yields are higher in EM countries.


Within the EM debt sector, there is a wide dispersion in yields. For example, real yields in Malaysia, Indonesia and Mexico are in the 80th percentile relative to their levels over the past 10 years, meaning that they are higher than they have been 80% of the time over that period (see chart below). Other EM countries, like Poland, Hungary and Chile, have real yields near the lows over the past 10 years.

Some EM countries have real yields near 4%, and many trade at historically high levels.


Bottom line: Investors looking for yield in government bonds who want to minimize credit risk should consider local-currency EM debt. Investors must carefully weigh ever-present political and currency risk in the asset class. But with due diligence, EM debt can offer relief from the negative rate blues in global government bond markets.

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness.