Top Developments in EM Bonds

My name is Eric Fine and I'm the portfolio manager for the active emerging market bond funds.

EM Bond Developments in Q1 2024

The two big developments in the first quarter of 2024 were: Number one by far, the repricing of Fed rate cuts. The market was pricing in six cuts the beginning of the year and it's pricing now or early in the second quarter pricing in two. That's a big change. 10 years sold off 60 basis points. That's one big thing.

The other big thing that happened is geopolitics. Not so much the situation in Ukraine changed but the understanding of the situation in Ukraine changed, at least in the US, and of course the Middle East wars escalated. That got oil from 72 to 86.

So those were the two big events. Interestingly, this is a good test for our thesis that EM is more resilient in these sorts of environments, but those were the two big events.

The Impact to Investors in the Short-term and Longer term

The short-term impact's actually pretty interesting. The oldest and most defensive part of emerging market bonds rallied. They were up 2%, even though dollar -denominated treasuries sold off by 60 basis points. So that's really interesting.

A category of EM bonds, dollar denominated bonds, rallied when dollar denominated US treasuries sold off. Totally consistent with our thesis that low debt levels in EM matter. Spreads just compressed as treasury yields rose. So that's one big takeaway, very consistent with our view that you want to be safe in bonds in this sort of an environment, you want to have EM bonds.

The other interesting thing, and this is somewhat predictable, is EM local currency sold off. It was down 3%. Why? Because it always does during periods of high volatility. That to us is an opportunity. And in fact, we increased our exposure to some of the higher yielding Latin currencies.

The important thing to know though, when I said that EM local currency sold off by 3%, which local? It was Thailand, it was Korea, the low yielding Asians that should have sold off and that we've reduced exposure to. Which ones rallied? Colombia, Mexico, Peru, exporters that are benefiting from this rise in commodity prices. Like I said, our thesis has always been EM over DM because EM has lower debt, it pays you more for it, and it benefits from a lot of these headlines that for most of your asset prices are negative. And for EM bonds, especially the exporters, if you're positioned right, you're winners.