| 2Q 2019

Valuation Metrics in Emerging Debt: 2Q 2019

Executive Summary

It has been a very strong year for emerging external sovereign and local currency bond markets. Sovereign credit spreads have fallen, emerging currencies have risen against the U.S. dollar, and local bond markets have also rallied. The EMBIG index is up 10.6% in the year-to-date through June 30, while the local debt GBI-EMGD index is up 8.7%.

Despite this rally, as we enter the second half of the year, we find valuations remain reasonably attractive. According to our valuation metrics, sovereign credit spreads provide ample compensation for the underlying credit risks, due in part to the fact that the credit quality of the asset class is improving. On the local debt side, emerging currencies remain at the cheap end of our neutral range, and attractive relative to the valuations prevailing in the past five years. Local rates markets, despite a strong rally, continue to look attractive relative to G-3 real yields.

In this piece, we update our valuation charts and commentary, and provide more detail on the methodology in the accompanying appendix.

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