Investors in emerging market (EM) debt have traditionally pursued securities denominated in a hard currency, which seek to provide a source of returns in the form of credit spreads over U.S. Treasuries. But during the past two decades, the debt market of emerging economies has evolved beyond recognition and today features a far more robust sector of locally denominated securities (or local debt) that offer two potential sources for returns:
- Local interest rates, which can provide returns from carry and capital gains.
- EM currencies, which can provide returns from short-term carry and capital gains as they fluctuate against the U.S. dollar.
In our view, emerging market local debt can benefit fixed-income portfolios with diversification properties and attractive risk/return characteristics over time.
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