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The case for EM investment grade USD bonds
The Emerging View
14 September 2020
Emerging Markets (EM) investment grade (IG) bonds have delivered superior returns to US IG fixed income, both on nominal and risk-adjusted bases. On a forward looking basis, EM IG should continue to outperform as the asset class offers higher spreads than US assets with similar leverage metrics for corporate bonds and superior indebtedness metrics at sovereign levels. The Fed is unlikely to be buying EM IG bonds directly, but the asset class should benefit technically from both scarcity value and valuation advantages as US bond markets get progressively more distorted by direct Fed purchases. The EM IG asset class is sizeable, diverse and liquid enough to receive large allocations. Still, the technical positioning is favourable with the supply of EM IG bonds limited by the fact that most IG EM sovereigns and corporations now meet the bulk of their financing needs in local debt markets. Overall, EM IG bonds represent a great opportunity for investors seeking to monetise the EM risk premium with moderate volatility in a world, where higher yielding IG-rated securities are increasingly difficult to come by.