Emerging market debt has been a boom-or-bust subset of fixed-income investing that adds currency and geopolitical risks to the standard risks of the asset class: interest rate, credit and liquidity. These additional risk factors result in higher yields to investors, but at a more volatile return profile than investment-grade or developed market alternatives.
Fund growth: The number of EM debt funds has grown fourfold since 2009, with stronger growth in institutional AUM. Interest from U.S. pension funds has remained mild since the global financial crisis, despite some making significant moves into the asset class.
Opportunities abound: EM debt issuances have historically dwarfed their closest yield counterpart, developed market high yield. Last year was a record year for issuances, a trend that continued into first-quarter 2018. China has been the source of about half of all issuances since 2010, and two-thirds of 2018's.
High yields: Yields on EM debt have averaged 300 basis points higher than U.S. Treasuries since 2010. EM debt yields and volatility have been lower than high yield. Recent spreads of the two have moved in step while risk perceptions have increased.
Consistent returns: EM debt's diverse universe allows managers to avoid riskier areas of the market. The J.P. Morgan EMBI has finished the year in the red once since the financial crisis. Fund excess returns have been less consistent, but with fewer declines than gains.
*Bloomberg Barclays Global High Yield Total Return index. **Yearly return data for the 12 months ended March 31. Sources: eVestment LLC, Bloomberg LP, T. Rowe Price