Navigating Rates

Three reasons emerging market bonds still look attractive

Fading hopes of multiple US rate cuts in 2024 would conventionally be seen as a negative for emerging market (EM) bonds. But spread levels and overall yields point to potential value in a maturing market that has become more resilient to defaults.

Key takeaways

  • EM government bonds are trading relatively tight to US Treasuries overall, but this has been driven by investment grade sovereigns.
  • We see appealing stories in high yield countries where the macroeconomic direction of travel is positive, such as Ecuador. 
  • With yields around 8% for the overall index and over 10% for high yield, the carry (gains made from bond income over time) available in EM looks attractive.
  • EM bonds have performed strongly despite negative perceptions, and the universe has become much more resilient to defaults and geopolitical crises.
1. EM investment grade spreads are tight, but high yield spreads are not

While the extra yield investors receive for holding EM government bonds over US Treasuries (the “spread”) overall has compressed over the last 12 months, it is important to look at this shift in the proper context.

As Exhibit 1 shows, most of this spread compression has taken place on investment grade (IG) rated EM sovereign issuers (middle chart), while high yield (HY) EM sovereign spreads are still some distance from previous tight levels. There is therefore further potential for spread compression in HY and we see relative value opportunities in several countries in the single-B rating bracket where the macroeconomic direction of travel is positive. One example would be Ecuador, where positive political developments are contributing to a solid economic story.

Exhibit 1: EM sovereign spreads aren’t excessively tight vs. the US

The JP Morgan EMBI Global Diversified Index (lhs) tracks liquid, USD emerging market bonds issued by sovereign and quasi-sovereign entities. EMBIGDIG (middle) and EMBIGDHY (rhs) reflect the constituents of the overall index rated investment grade and high yield respectively. Source: AllianzGI, Bloomberg, as of 16 April 2024.

2. Overall yields remain historically high

While EM spreads may have tightened, overall yields remain high relative to history (see Exhibit 2). The yield on the overall index (lhs chart) is at a sound 8%, with the high yield index (rhs chart) still above 10% despite the move lower in recent months. This high carry (gains made from bond income over time) boosts total return prospects and is an important driver of value in our view.

Exhibit 2: High overall yields improve total return prospects

The JP Morgan EMBI Global Diversified Index (lhs) tracks liquid, USD emerging market bonds issued by sovereign and quasi-sovereign entities. EMBIGDIG (middle) and EMBIGDHY (rhs) reflect the constituents of the overall index rated investment grade and high yield respectively. Source: AllianzGI, Bloomberg, as of 16 April 2024.

3. EM bonds have performed strongly despite negative perceptions

In previous years the EM bond market would often suffer from contagion – one sovereign default or geopolitical flashpoint would spill over and affect valuations across the entire asset class – which made some investors wary.

However, as Exhibit 3 shows, those shunning EM allocations would have missed out on potentially strong returns, which over time have outstripped more mainstream fixed income risk assets such as US high yield bonds.

Over the years contagion around EM defaults and geopolitical crises has become more contained. Today the universe is much larger and more diverse, meaning idiosyncratic issues in one or two countries don’t tend to lead to perceived higher default risk in others.

For this reason, we believe active management and careful credit analysis remains essential to avoid underperformers, which in our view is of equal importance to picking outperformers in EM.

Exhibit 3: EM fixed income performance vs. US High Yield, US Treasuries
Exhibit 3: EM fixed income performance vs. US High Yield, US Treasuries

Chart shows total return of JP Morgan EMBI Global Diversified Composite Index (JPEIDIVR Index), ICE BofA US Cash Pay High Yield Index and ICE BofA US Treasury Index, for a $100 Original Investment since 1993. EM External Debt = JPEIDIVR Index, US High Yield = J0A0 Index, US Treasuries = G0Q0 Index. Source: BofA Global Research, Bloomberg, JP Morgan EMBI Global Diversified Composite Index, ICE Data indices, LLC. Data as of March 2024. Past performance does not predict future returns.

  • Disclaimer
    Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

    The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted. This material has not been reviewed by any regulatory authorities. In mainland China, it is for Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations and is for information purpose only. This document does not constitute a public offer by virtue of Act Number 26.831 of the Argentine Republic and General Resolution No. 622/2013 of the NSC. This communication's sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of this document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced, except for the case of explicit permission by Allianz Global Investors. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Brazil, Panama, Peru, and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional /professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.

    This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; Allianz Global Investors UK Limited, authorized and regulated by the Financial Conduct Authority; in HK, by Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; in Singapore, by Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; in Japan, by Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424], Member of Japan Investment Advisers Association, the Investment Trust Association, Japan and Type II Financial Instruments Firms Association; in Taiwan, by Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan; and in Indonesia, by PT. Allianz Global Investors Asset Management Indonesia licensed by Indonesia Financial Services Authority (OJK).

    3550659

Explore Insights

Navigating Rates

With all signs pointing to a Donald Trump win, we expect many of his populist policies to cause ripples, even though markets were largely priced for this outcome. How might investors navigate the election result?

DISCOVER MORE

Navigating Rates

The US Federal Reserve’s policy pivot has ushered in a new investment regime that should help provide a near-term floor for risk sentiment

Read More

Navigating Rates

Going into the year, 2024 was always set to be an intense election period, with polls in more than 60 countries. It turned out to be even more action-packed than anticipated, with snap elections in France and Japan giving investors even more to focus on, in addition to the US election. What are the implications of one of the busiest years in election history? We asked our global CIOs how investors could position themselves in a shifting political terrain.

Read More

Allianz Global Investors

You are now leaving the Allianz Global Investors’ website and being redirected to

Welcome to the Allianz Global Investors website dedicated to the United Kingdom

Select Role
  • Adviser & Wealth Manager
  • Individual Investor
  • Institutional Investor
  • You have connected to this site as a “Professional” as defined by MiFID.  To continue, you must have the experience and knowledge required in investment management, particularly regarding the risks involved in accessing this site.

    If you are not a “Professional” client, we invite you to leave this page and reconnect on the “Individuals” page from the Allianz Global Investors website.

    US persons: The information shown on this site is not intended for US citizens, US nationals, or to those US persons such as defined by “Regulation S” of the Securities and Exchange Commission under the Security Act of 1933.

    This site is only intended to provide information on Allianz Global Investors and the products authorised for marketing in the UK.  The information presented on this site does not constitute an offer to sell or subscribe to a financial instrument.

    The views and opinions expressed herein, which are subject to change without notice, are those of the issuer companies at the time of publication. Your access is subject to the UK regulation and to the legal terms and general conditions of access to this site.

    In choosing to access our site, you acknowledge that you understand and accept these conditions.  We advise, for your best interest, to read these conditions carefully.

    Please read the following page carefully before proceeding as it contains important information concerning your use of the website and explains certain legal and regulatory restrictions applicable to any investment in Allianz Global Investors investment products. By pressing ‘Accept’ you agree that you have read and understood the following information.

    The material on this site is directed only at persons in the UK and does not constitute an offer or invitation to buy or sell the funds to persons in any jurisdiction other than the UK.

    Allianz Global Investors (AllianzGI) has taken reasonable care to ensure the accuracy of information available through the site. However, the information may be amended at any time by AllianzGI without notice. As far as it is permitted under the Financial Services and Markets Act 2000, AllianzGI does not accept liability for any loss, direct or indirect, owing to reliance on any information contained herein.

    Opinions expressed whether in general or both on the performance of individual funds and in a wider economic context represent the views of the contributor at the time of preparation. They are subject to change and should not be interpreted as investment advice which AllianzGI is not authorised to give.

    This site may provide links to third party websites over which AllianzGI has no control. These links are provided for your convenience and AllianzGI accepts no responsibility for the content of such websites.

    For your security we may record or randomly monitor all telephone calls.

    A word of warning
    Past performance does not predict future returns. The value of investments and the income from them can go down as well as up and an investor may not get back the amount invested. 

    Exchange rate fluctuations may vary causing the value of overseas investments to go down or up. For your own security any calls may be recorded and randomly monitored.

    For information on any specific risks associated with our funds and products please see our Key Investor Information Documents (KIIDs) and Supplementary Information Documents (SIDs).

    The use of this website is subject to English Law and any dispute will fall under the jurisdiction of the English courts.

    Regulation and Status Disclosure
    Allianz Global Investors represents products and services of Allianz Global Investors UK Limited, www.allianzglobalinvestors.co.uk. Allianz Global Investors UK Limited is an investment company, incorporated in the United Kingdom, with its registered office at 199 Bishopsgate, London, EC2M 3TY. 

    Allianz Global Investors UK Limited, company number 11516839, is authorised and regulated by the Financial Conduct Authority. Details about the extent of our regulation are available from us on request and on the Financial Conduct Authority’s website (www.fca.org.uk). The duplication, publication, or transmission of the contents, irrespective of the form, is not permitted; except for the case of explicit permission by Allianz Global Investors UK Limited.

    Throughout the website Allianz Global Investors UK Limited may sometimes be referred to as Allianz Global Investors or AllianzGI.

    Copyright
    Copyright in this website is owned by Allianz Global Investors UK Limited. The copyrights of third parties are reserved.

    You may download or print a hard copy of individual pages and/or sections of the website, provided that you do not remove any copyright or other proprietary notices. Any downloading or other copying from the website will not transfer title to any software or material to you.

    You may not reproduce (in whole or part), transmit (by electronic means or otherwise), modify, link or use for any public or commercial purpose the website without the prior permission of Allianz Global Investors.

    Cookies
    Allianz Global Investors UK Limited uses session cookies for the purpose of saving data relating to the management of a user session in the memory of the web browser on the user’s computer. By cookie it is meant the small text file that is stored on the hard disk of a computer by the web browser on the said computer. Such file contains information sent by the web server of the Website that a user has visited. The information derived from session cookies enables Allianz Global Investors UK Limited to identify which areas of the Website are seemingly of more interest to users so that it can improve the Website and the information provided to users. The data which is stored via session cookies does not include any private information regarding the user, and is erased as soon as the browser is shut down. It is to be noted that most web browsers are set up in such a way that they automatically accept cookies. Users can, however, amend the configuration of the web browser on their computers so that they are systematically notified of any instance where the Websites that they are about to visit contain cookies.

Please check the checkbox to accept the terms and conditions.