Hard currency debt:
Credit Spreads: Rich
- The current excess spread of 71 bps continues to fall in our first quintile of attractiveness, tightening significantly over the quarter.
- Historically, an excess spread in this quintile has been associated with a subsequent mean 2‑year annualized credit return of -2.0% (above the risk-free rate).
- This implies a valuations-based negative assessment.
USD Rates: Neutral
- Our “deviation from fair value” for USD interest rates (page 8) shows a modest increase in the attractiveness of USD duration, with current levels slightly below fair value.
Local currency debt:
FX: Attractive
- At +1.5%, our expected spot return indicator lands in the upper end of the third quartile of attractiveness.
- Mean subsequent GBI-EMGD weighted spot return has been +5.1% for the third quartile and +6.8% for the fourth quartile.
Local Rates: Very Attractive
- EM local rates maintained a very attractive valuation gap versus U.S. interest rates.
- At +1.4%, this is in our most attractive fourth quartile, where the mean subsequent EM/U.S. return differential has been +4.1%.
Blended currency debt:
50%/50% Strategic Blend Portfolios: Currently Tilted Max Local (70%) vs. Hard Currency (30%).
- Given the unusually extreme relative valuations, blended currency benchmarked portfolios are currently tilted to max local currency debt.