JPMorgan Says Local Debt ‘Star’ of Emerging-Market Fixed Income

Local debt has been the “star” performer among emerging-market bonds this year and its advantage over hard-currency notes will likely persist, according to JPMorgan analysts.

(Bloomberg) — Local debt has been the “star” performer among emerging-market bonds this year and its advantage over hard-currency notes will likely persist, according to JPMorgan analysts. 

Bonds in local currencies have underperformed hard-currency bonds for much of the last decade partly as a reflection of the 10-year bull run of the dollar, analysts including Jonny Goulden and Saad Siddiqui wrote in a report dated Thursday.

“Recently, however, the strong run of emerging market local markets returns since the last quarter of last year has raised the question of whether EM local markets can have a longer run of outperformance,” they said. They said a likely US recession towards the end of the year could lead to more inflows.

The analysts noted that so far, despite the outperformance, those inflows had failed to materialize. 

“Typically, positive returns lead to inflows, as more investors not yet involved look to some momentum in an asset class moves or themes,” they said. “But this has not happened for EM local markets this year,” they said, adding that “ahead of a likely US recession, adding a risky fixed income asset class such as EM local bonds that you have not been much involved with for a decade might be a step too far.”

Latin America, which offers the highest interest-rate differentials, is “the engine of EM local markets,” the analysts said. They also said they’d gone overweight Nigeria against Kenya in their model portfolio, taken profit on their overweight in Ecuador, and remained underweight emerging sovereign credit more generally.

“We expect the higher rated portion of the index to sell off more significantly in a US recession, given it has not so far,” they said, referring to JPMorgan’s EMBIGD emerging-market hard-currency bond index.

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