Emerging market debt is the fastest-growing sector of the world securities market. This year, emerging market securities outstanding will surpass US-issued foreign securities.
There’s yield to be had by piling up emerging market bonds, but not that much. BB-rated EM debt now pays just 2% more than US issuers of the same rating.
That’s a lot better than in late 2015, when EM debt paid barely half a percentage point more. The big jump in EM spreads at the beginning of 2015 reflects the deflationary impact of the dollar’s rise on weaker EM issuers, particularly Brazil. whose problems were compounded by the mother of all corruption scandals at the national oil company Petrobras. There’s little upside and a lot of room to crater in this market. The Templeton Global Bund fund got smoked owning an enormous percentage of Ukraine’s foreign debt. Brazilian local-currency debt lost 17% this year and cut deeply into returns at Pimco and Investec. Look carefully at your bond fund’s holdings, and watch out for heavy Latin American exposure, or exposure to heavily-indebted countries like Turkey. If you’re going to be a yield pig, make sure you’re not the one getting smoked.