COTW: Emerging Markets, Developed Risks

August 27, 2018

The chart below can be downloaded here


After a decade of outperformance relative to U.S. core bonds, emerging market bonds (as proxied by the J.P. Morgan Emerging Market Bond Index) have struggled recently (-5% YTD through Friday) as concerns about the ability of several countries to repay their external debt obligations have become more acute.  The issues are not new, but have been brought into the limelight recently as tightening U.S. financial conditions and a rising U.S. dollar have increased the servicing costs on these foreign debts.  The areas of greatest concern are countries like Turkey, Argentina and South Africa due to their persistently large current account deficits (reliance on foreign inflows) and significant external debts (high accumulated debt balances), most of which are denominated in foreign currencies.


The intersection of these two factors is presented in the chart below with the size of the bubbles referencing the weight of each country in the J.P. Morgan Emerging Market Bond Index. Turkey, for instance, has an external debt-to-GDP ratio of over 50%, a current account deficit of over 7% and represents 3.7% of the index. The three problem countries listed above represent about 10% of the index.


We view emerging market bonds through the same lens as any other spread bond category: higher risk (i.e. the risk of a default) is fine as long as we believe the yield compensates us for that risk. The current yield on emerging market bonds is a little over 5% while sovereign default rates have averaged about 1.3% for the last 20 years; however, that number may be misleading given the massive increase in the size of the asset class and the easy availability of capital as global investors reached for yield. Assuming defaults stabilize at 2%, emerging market bonds are priced to outperform investment grade U.S. bonds by about 100 bps for the next decade. By our estimates, the break-even default rate where the returns of emerging market bonds will be less than U.S. investment grade bonds is 3.2%. Given the problem countries below represent about 10% of the index, we would like to see yields even higher before allocating capital to emerging market bonds.



SpringTide Partners, LLC is a Registered Investment Advisor with the state of Illinois and other states jurisdictions where required. Registration with the SEC or any state securities authority does not imply a certain level of skill or training. All information contained herein is for informational purposes only and does not constitute a solicitation or offer to sell securities or investment advisory services. All investing carries risk including risk of principal loss. All statements made on this website are opinions of SpringTide Partners, LLC and are subject to change. SpringTide Partners, LLC assumes no responsibility towards the accuracy of the data included. Statements made on website shall not constitute investment advice.

Share on Twitter
Please reload

White PNG.png
SpringTide Partners
200 West Superior Street, Suite 200
Chicago, Illinois 60654
T  312 620 6362
  • White Twitter Icon
  • White LinkedIn Icon

Manager submissions? Submit info here

The information contained in SpringTide Partner's website is of a general nature and for informational purposes only and does not constitute financial, investment, tax or legal advice. These materials reflect the opinion of SpringTide Partners as of the date produced and are subject to change at any time without notice due to a variety of factors, including changing market conditions or tax laws.  Where data or analysis is presented that is prepared by third parties, such information will be cited. These sources have been deemed to be reliable by SpringTide but no guarantee can be made as to their accuracy.  Any links to third party websites are offered for use entirely at your own discretion. SpringTide Partners is separate and unaffiliated from any third parties listed herein and is not responsible for their products, services, policies or the content of their websites. All investments are subject to varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy or product referenced directly or indirectly in this website will be profitable, perform equally to any corresponding indicated historical performance levels, or be suitable for your portfolio. Past performance is not an indicator of future results.

© 2019 SpringTide Partners. All Rights Reserved.