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Negative yields on developed market government debt have led to
a greater interest in emerging market bonds. However, Adam Lewis
says the higher yields come at a price
Thinking positive
I
n a world where $16trn of
developed market bonds are now
offering negative yields, it is little
surprise that emerging market
debt has captured the imagination of
investors in recent years.
The emerging market debt universe
has grown to $3trn over the past
decade – with an average yield in dollar
terms of 5 per cent, none of which is in
negative territory, according to Jupiter.
Yet while bonds in the sector offer
better yields than their developed
market counterparts, Victoria Hasler,
director of research and consulting
at Square Mile, cautions that higher
returns seldom come for free.
“The recent troubles in Argentina
serve to highlight the potential
dangers associated with investing
in emerging market debt,” she says.
“While we have lived through a strange
period of strong returns in almost all
markets over the last 10 years or so, it is
easy to overlook the obvious: investing
in emerging market debt does not
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come without risks and political risks
tend to be much more significant in
many emerging markets.”
Depending on the particular bonds
they are buying, Hasler adds investors
also have to contend with interest
rate risk, credit risk and currency
risk, meaning they should tread
with caution if they are substituting
developed market bonds for emerging.
“The two are quite different asset
classes and bring different risks and
rewards,” she says. “Emerging market
debt does have benefits and can look
attractive on many levels. The yields
“Investing in emerging
market debt does not come
without risks and political
risks tend to be much
more significant in many
emerging markets”
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