Hard currency debt:
Credit Spreads: Rich
- The current excess spread of 121 bps continues to fall in our first quintile of attractiveness
- Historically, an excess spread in this quintile has been associated with a subsequent mean 2 year annualized credit return of -1.9% (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 deterioration in the attractiveness of USD duration, with current levels slightly below fair value
Local currency debt:
FX: Attractive
- At +1.2%, 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 +6.8% for the fourth quartile and +5.1% for the third quartile
Local Rates: Very Attractive
- EM local rates maintained an attractive valuation gap versus U.S. interest rates
- At +1.3%, 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