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The power of carry

Market Commentary

05 February 2020



Quantitative Easing (QE) policies in developed countries triggered a flight from yield in Emerging Markets (EM) as investors pursued capital gains in developed markets instead. As the capital gains in developed markets fade and with yield nowhere to be found, a search for yield in EM has finally begun. EM external debt funds have received steady inflows over the past ten quarters. However, EM’s local bond markets are still de facto ‘flow virgins’ in a QE world, that is, these markets have yet to be penetrated by serious foreign money. This report quantifies the power of carry in EM local markets, given the low yields in developed countries. Regardless of the chosen metric for returns – real, nominal, Dollar-denominated or in local currency terms – yield alone should enable EM’s local currency government bond markets to outperform developed government bonds markets of similar duration massively over the next few years. Add potential currency upside after years of Dollar appreciation and the profile of EM local bonds looks even more compelling.

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