Quarterly EM Debt Update | 3Q 2018

Emerging Debt Valuation Update: 3Q18

Executive Summary

The punch line: Due to the 26-bp spread tightening in the third quarter (to 362 bps), USD external debt (EMBIG) valuations deteriorated and remain on the expensive side of historical valuations, as fundamentals didn’t improve in a way that justified such tightening. In contrast, for local currency debt (GBI-EMGD), EM currencies declined 1.2% and the yield remained roughly unchanged (-4 bps to 6.62%). Valuation of EM currencies and rates remained mostly unchanged in the third quarter when compared to the second quarter. Our attractiveness measure for EM currencies remains above the historical average. Moreover, the USD remains in “rich” territory while the EUR moved from “cheap” to “rich” territory during the third quarter. Meanwhile, real yield differentials between EM local bonds and developed market bonds remain wide, above historical norms.

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