Emerging market debt: the rally is not over yet

As we get closer to the end of 2020, investors start to make the sum of what we can call a unique year. With the Covid-19 pandemic, volatility picked up substantially. Although many assets are still on the way to recovery, some have rebounded sensibly. Emerging market bonds have experienced an exceptional rebound, which is making many wondering whether they can continue to rise.

There are several reasons why we are bullish emerging markets .

First of all, the Federal Reserve will not hike interest rates until it sees a rebound in inflation. This means that investors will be pushed to search for solid returns outside their comfort zone. It also implies that if interest rates don't rise, emerging markets will be able to continue to finance themselves conveniently.

Emerging markets' constant need for financing is a point that is worrying investors as they become more and more dependent on capital markets. We don't believe this to be a significant problem. EMs have just gotten the green light by the IMF to engage in expansionary monetary policies which, in return, will ultimately support their fixed income market value. Secondly, even though the Covid-19 pandemic has added pressure to certain geographies and sectors, in 2020, the market has seen EM debt maturities getting longer, not shorter. This is a positive trend because it means that countries can lock in low interest rates for longer, decreasing refinancing risk in the short- and mid-term. One of the best examples is the one of Turkey, which was able to extend maturities in both dollar and lira debt even amid a currency crisis. Peru, similarly, issued $4 billion bonds this week with 12-, 40- and 100-year maturities. Peru's 100-year bonds priced at 170 basis points over the Treasuries, making it the lowest-yielding century bond in the emerging market world.

The engaging of accommodative monetary policies by developed central banks are also having a positive effect on emerging market debt. As the graph below shows, EM hard currency sovereign debt has performed better compared to EM local currency government debt. This trend can be explained by the expansionary policies that the Federal Reserve and the ECB engaged in following the Covid-19 pandemic, which pushed yields down across all assets. As central banks worldwide continue to add stimulus, we can expect these assets to continue to be supported.