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Lower US yields make EM spreads attractive

Weekly investor research

19 August 2019

A record of USD 16trn of developed market bonds – equivalent to 18% of total outstanding developed market fixed income – have now moved into negative yield territory, including USD 1trn of corporate bonds. The manufacturing recession is the cause of the US Treasury yield curve inversion as expectations of weaker growth drive interest rates to record lows. Value investors should move into bonds with better risk-reward metrics. The rally in Treasuries has so far not been matched by a rally in Emerging Markets (EM) dollar-denominated bonds. EM bonds trade with nearly 50bps wider spread than just a few weeks ago. In local markets, most EM central banks still have room to cut interest rates, which we think could be highly supportive of growth. If recession fears further adversely impact US equities, the Dollar will ultimately be the casualty, further enhancing the attractiveness of EM local bonds.

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