EM local currency debt looks attractive

With government debt still trading at negative yields in many developed markets, investors might want to take a closer look at emerging markets (EMs) local currency debt which currently offers some opportunities, according to Eaton Vance’s emerging markets debt team.

At the same time, the firm stressed that although local currency EM debt did carry risk, it represented minimal credit risk compared to hard currency EM debt.

“Even in the US, five-year treasury yields are negative when deflated by inflation expectations. The situation is not likely to change any time soon,” Eaton Vance wrote.

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“Against this backdrop, emerging markets local-currency debt offers opportunity, even after the recent rally in yields.”

However, investors should be aware that there was a wide dispersion in yields within the EM debt sector, with countries like Malaysia, Indonesia and Mexico seeing their real yields in the 80th percentile relative to their levels over the past 10 years.

On the other side, other EM countries such as Poland, Hungary and Chile had real yields near the lows of the past few years.

“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,” Eaton Vance wrote.

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