Emerging market local currency (EM LC) bonds have been among the best-performing fixed income asset classes over the past three years, but remain under-owned and often misunderstood. Real yields are close to 15-year highs, even as the benchmark J.P. Morgan GBI-EM Global Diversified Index is now investment grade (IG) on average. Beneath that average, attractive high-yield (HY) opportunities remain, both in the index and off-benchmark.

The wide range of idiosyncratic country stories offers ample scope for active alpha generation, in our view, particularly while EM currencies remain broadly cheap against an overvalued dollar.