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It has begun
Weekly investor research
10 July 2017
Developed Markets (DM) bonds have begun to suffer outright losses and are now underperforming Emerging Markets (EM) bonds. As we explain in the global backdrop section, the current bout of risk aversion in global bond markets led by a repricing of German bonds is more technical than fundamental in nature, and hence a great opportunity to reset longs in EM fixed income. We expect the pattern of EM outperformance to continue for several years. We have explained below that due to the very low starting point for DM bond yields it will take a very long time for carry to make up for the capital losses currently experienced in DM. Meanwhile, since EM yields are much higher, the opportunity cost of staying invested in DM bonds is very large. Investors would be far better off switching to EM now. As for the risk aversion arising from the lack of US leadership in the G20 and the Qatar and the North Korean situations, we do not expect them to impact EM fundamentals meaningfully.