Chart of the Week

Weekly chart using economic data to address timely market topics from the Wells Fargo Investment Institute Global Investment Strategy team.

June 13, 2018

Peter Wilson, Global Fixed Income Strategist

Where in the World to Find Attractive Bond Yields

Emerging market bond yields are far above those in developed marketsSources: Bloomberg, JP Morgan. May 29, 2018. The developed market bond index is the JP Morgan Government Bond Index (GBI) Global, ex-U.S. The local-currency emerging market bond index is the JP Morgan Government Bond Index – Emerging Markets (GBI-EM). The dollar-denominated emerging market bond index is the JP Emerging Markets Bond Index Global (EMBIG). An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results. No investment decision should be made on the basis of yield alone. This chart was excerpted from the Investment Strategy report dated June 4, 2018.

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Emerging market bond yields are far above those in developed markets

Investors may remember when political risk and poor liquidity were known hazards of emerging-market bond investing. But much has changed in recent years. The latest Italian political turmoil reminds us that political dislocation and low-liquidity pockets also can be risks in developed markets. And many emerging markets have developed broader and deeper financial markets, a domestic investor base, and stronger governance structures (although there are exceptions).

The chart shows that developed-market bond yields (at the index level) remain exceptionally low—at around 1%—depressed by years of low inflation and massive central-bank bond purchases in Europe and Japan. Dollar-denominated and local-currency emerging-market bond indices have significantly higher yields, now in the high 6% zone. These yields are comparable with the U.S. high-yield asset class, but with a more favorable risk/return profile, in our opinion.

What it May Mean for Investors

We prefer emerging-market bonds over developed-market debt today, based on far more attractive yields (from near 5.25% in late 2017 to above 6.50% today), along with improved policy making and more robust market structures. For these reasons, we recently shifted our view on emerging-market fixed income from neutral to favorable.

Risks Considerations

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve.

Investments in fixed-income securities are subject to interest rate, credit/default, liquidity, inflation and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and principal. This risk is higher when investing in high yield bonds, also known as junk bonds, which have lower ratings and are subject to greater volatility. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.

Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.

Definitions

JPMorgan GBI Global ex-US is a representative of the total return performance in U.S. dollars on an unhedged basis of major non-U.S. bond markets.

JPMorgan GBI-EM is a comprehensive global local emerging markets index, and consists of liquid, fixed-rate, domestic currency government bonds.

JPMorgan Emerging Markets Bond Index Global (EMBI Global), which currently covers 27 emerging market countries. Included in the EMBI Global are U.S.-dollar-denominated Brady bonds, Eurobonds, traded loans, and local market debt instruments issued by sovereign and quasi-sovereign entities.

An index is unmanaged and not available for direct investment.

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

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