EM debt value increases as German yields turn negative

Emerging market bonds have failed to recover from the brutal sell-off in 2013 when investors bailed out in anticipation of the end of quantitative easing in the US, but the yields available are now a lot higher than those on developed market bonds.

The JPM EMBI Global Diversified index, a dollar-denominated index that tracks emerging market debt, is now 18.3 per cent lower than before the sell-off, while bond yields have grown.

Investors continued to pile into developed market government debt last week, resulting in Germany auctioning five-year debt at a negative yield for the first time in its history.

This means investors who hold the bonds to maturity would, in effect, be paying to lend the German government money. Such an investment could prove useful in a deflationary environment or if yields fall further into negative territory.

Analysis from specialist emerging markets asset manager Ashmore found that the average nominal yield – unadjusted for inflation – on a five-year emerging market government bond was now 6.1 per cent, compared with just 0.8 per cent for the average developed market equivalent.

Even adjusted for inflation, emerging market bonds offer a yield premium, with five-year debt yielding 2.26 per cent compared with a negative real yield of 0.04 per cent from developed world debt.

Ashmore’s analysis compared the average from 13 developed markets, including Germany, France, Italy, the US and the UK, with 16 emerging economies, including Brazil, Turkey and South Africa.

Jan Dehn, head of research at Ashmore, claimed the data showed that from a “relative value perspective, the case for investing in emerging market fixed income as an alternative to developed market bonds is now very strong”.

He added emerging market countries had come out “largely unscathed” from a series of shocks, including large withdrawals by international investors and weakening currencies against the dollar.