Emerging Markets Fixed Income: Volatility rises, opportunities emerge

Our emerging markets fixed income team provide an overview of the mixed returns delivered in Q1 2018 and explain why better returns are expected in Q2 2018.

11 Apr 2018

Emerging markets delivered mixed returns during Q1 2018
On the one hand, credit – sovereign and corporate debt – suffered the impact of the UST sell off and heightened volatility, delivering negative quarterly returns for the first time in five quarters. On the other hand, rates and FX debt showed robust positive returns as high-yielding local bonds rallied on better macroeconomic fundamentals and lesser political uncertainty in several countries.

Better returns expected in Q2 2018
Credit will earn its carry on the back of more stable UST yields. Going forward, we expect high yielding EM rates to perform well and we see pockets of value in markets like Argentina and South Africa. The weakening USD trend has further to go, including against the CNY, where the authorities have revealed their preference for a stronger currency. A solid 4% return in Q1 2018 bodes well from EM local (rates/FX) to generate high-single-digit returns in 2018.