Quarterly EM Debt Update | July 21, 2023

Valuation Metrics in Emerging Debt: 2Q 2023

Our emerging market debt valuation metrics across all but the U.S. interest rate dimension remain unambiguously attractive. In our Quarterly Valuation Update, we provide our Q2 assessment.

Hard currency debt valuations:

  • EMBIG-D credit spreads tightened while the expected losses widened, partially due to the inclusion of the updated 2022 S&P sovereign credit transition matrix, which became available. The current credit multiple of 2.9 is in our second quintile of attractiveness, which is neutral to mildly positive. This quintile has had a 1.0% median 2-year subsequent annualized credit return (above the risk-free rate).
  • With the Fed continuing to raise U.S. interest rates, Fed funds yield more than 10-year swaps, and the forward curve remains highly inverted. The market is pricing 10-year rates to be 3.5% in three years' time, comfortably above the Fed's 2% inflation target but below the most recent 4.0% Y/Y May CPI and 4.6% Core PCE inflation figures. We find this pricing somewhat ambiguous in generating a clear outlook, so we remain neutral.

Local currency debt valuations:

  • In FX, expected spot return indicator remained in our attractive valuation zone during the quarter. At 0.5%, this is in our attractive third quartile, where median subsequent GBI-EMGD weighted spot returns have been 4.8%.
  • EM local interest rates maintained an attractive valuation gap versus U.S. interest rates as inflation-related forecasts are falling faster in EM than in the U.S. At 0.5%, this is in our attractive third quartile, where median subsequent EM/U.S. return differentials have been 2.2%.


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