Historically, investors have demanded higher compensation – usually in the form of higher yields – to lend to a high debt, low growth nation than they would a low debt, high growth one. But as this week’s OppChart shows, today’s global bond market reflects quite the opposite. The sovereign debt issued by many emerging market countries offers higher yields than the developed world, despite those emerging nations having progressively higher credit quality, better debt-to-GDP ratios, and more favorable growth prospects than many countries in the developed world. Investors may be recalling the bad old days of runaway inflation and economic mismanagement in the emerging world. But many emerging countries have truly transformed into durable economies with real growth prospects and deficits that remain in check.
We believe emerging market bonds as a category are generally poised to continue to benefit from better fiscal positions, faster growth and tighter monetary policy than their developed counterparts—all conditions that bode well for bonds denominated in emerging market currencies. There are opportunities for higher yield in sovereign, quasi-sovereign, and corporate debt in the developed world outside of the U.S. In addition, given U.S. investors’ large U.S. dollar holdings outside of their investment portfolios, investing in multiple global currencies may help diversify that large overweight. Exposure to fixed income and currency outside the United States may help unlock a greater opportunity set and diversify currency exposure.
Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes and political and economic uncertainties. Emerging and developing market investments may be especially volatile. Fixed income investing entails credit risks and interest rate risks. When interest rates rise, bond prices generally fall, and a Fund’s share prices can fall. Diversification does not guarantee profit or protect against loss.