Emerging Market Fixed Income
Introduction / Benefits / Differences
The predominant discussion point when talking about fixed income is always related to developed market fixed-income securities. I am also only writing and commenting about the US, Europe/UK and Japan. That makes sense as it’s usually the heartbeat of global macro, with a particular interest in the US market, which links many global bond markets together.
In the vast expanse of global macro investing, however, the gravitational pull of developed markets frequently eclipses the nuanced dynamism of emerging market fixed income. The spotlight often shines on the stalwarts of stability and liquidity, where developed markets offer a familiar tableau of investment opportunities. Yet, beyond this well-trodden path lies a less explored terrain, brimming with potential yet accompanied by a unique set of challenges and rewards.
Amidst a backdrop where developed markets set the pace of global economic trends and investment standards, emerging market fixed income presents a dichotomy of heightened risk and promising growth. The voyage is as much about understanding the delicate balance of risk management as it is about identifying pockets of value that defy conventional wisdom. By delving into the mechanisms that drive yield and capital appreciation in these markets, we aim to dissect the complexities and discover the opportunities that emerging market fixed-income presents to us investors.
Fundamentally, there are no massive differences between EM (Emerging Market) and DM (Developed Market) debt. The principles of bond math and links to inflation/growth and monetary policies remain the same. The key understanding, however, is that the debt instruments trade more like Credit, given their underlying default risk and liquidity. Credit, as we know, is a study in assessing the likelihood of return of capital and hence the creditworthiness of the lender. EM is no different.
This post will discuss the main characteristics of investing in EM debt and its suitability in a portfolio context. I will cover both elements of hard-currency (HC) EM debt, which is debt denominated in either USD or EUR and local currency EM debt, which is denominated in the currency of the issuer’s currency.
Let’s get exploring.