Fixed Income Analysis /
Global

EM bonds: Soft start to the year

  • Total return on the EMBIGD is -1.1% month-to-date

  • High yield and event-driven situations have outperformed. Costa Rica is the top performer followed by Sri Lanka & Angola

  • Worst performer is Ecuador, while 10 out of the bottom 12 are in South or Central America

EM bonds: Soft start to the year
Stuart Culverhouse
Stuart Culverhouse

Head of Sovereign & Fixed Income Research

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Tellimer Research
29 January 2021
Published byTellimer Research

The performance of EM bonds (sovereign dollar bonds) has been somewhat soft at the beginning of 2021. The total return on the EMBIGD is -1.1% month-to-date (to 28 January), with the EMBIGD spread up by 7bps to 359bps. This performance is in stark contrast to the year-end rally, buoyed by the US election result and positive vaccine news.

The negative performance MTD may reflect: (i) some profit taking, after a good run, (ii) concerns about the near-term outlook for the pandemic, given the recent rise in infections and emergence of new more transmissible variants, (iii) market chatter over the risks of a repeat of the 2013 taper tantrum, which saw the 10-yr UST yield rise by 20bps at the beginning of the month (although US bonds have since recovered some of these losses); and (iv) supply, given the bumper start to the year in EM bond issuance. And this is despite some optimism over the global economic outlook from Q2.

High yield and event-driven situations have outperformed. Costa Rica has been the top performer (+6.5%), after news of an IMF agreement. Sri Lanka (+5.1%) and Angola (+4.3%) — two of our Top-5 picks coming into this year — follow. Other top performers are El Salvador (+2.0%), Pakistan (+2.0%), and Iraq (+1.8%). Venezuela also appears in the top 5 although pricing may be more erratic in default situations, so we wouldn't read too much into that.

At the other end of the scale, the worst performer (and by some distance) is Ecuador (-13.8%), reflecting market concerns over the outcome of the country's presidential election on 7 February. The new restructured ECUA 0.5% 2030s, for instance, has fallen 10pts this month to US$54. This is followed by Argentina (-5.0%) and Belize (-4.5%). Indeed, remarkably, 10 out of the bottom 12 are in South or Central America.

A slightly different picture is presented if we look at volatility-adjusted returns (we adjust for 3m volatility of returns). While Costa Rica still comes out on top, it is followed by Poland, Georgia, Vietnam, and Croatia. At the bottom, it is largely the same, with Ecuador still the worst performer, while other names have swapped places.

EMBIGD total return – month to date (%)

EMBIGD total return – volatility adjusted  MTD (%)