Emerging Market Debt Still Worth Consideration

Like many other fixed-income assets, emerging markets external (sovereign) debt has rallied sharply in recent weeks. While EMD has not moved as dramatically as high yield in the wake of the Federal Reserve’s QE3 announcement, its spread has continued a narrowing trend that began in early June. Since the end of May, the EMBI Global Diversified spread has fallen 135bp. With U.S. Treasuries not moving much, the all-in yield in the EMBIG-Div, which dropped below 5 percent in mid-July, now stands just above 4.5 percent. At first glance, this yield, meager by long-run EMD standards, may not seem very appealing.

Two factors, though, make EMD still worth considering. First, while slight compared with their long-run average, spreads remain reasonable next to their more recent history, in this case the more relevant benchmark. Second, while yields have shrunk across the fixed-income universe, implied volatility in the U.S. Treasury market has also faded. To the extent that this low-volatility environment persists, Sharpe ratios in various credit markets may remain interesting even with prosaic headline yields.

自1994年初以来，Embig Spread平均过大约570bp。EM信誉较远的信誉大幅提升。自2000年代初以来，EMBIG的平均信用评级几乎不断上升，而且现在大部分指数现在都在投资级领土。那么，有保证的信用额，那么，随着时间的推移可能会缩小，渲染长期传播比较误导。在这方面，EMD不同于，比例由定义受到定义，并且可以安全地检查扩展水平的频率质量。EMD在2005 - 07年和2010年期间传播（取出危机时期，当差价爆炸出来）平均为280bp。从这种意义上说，今天的差价似乎是广泛的，甚至不得不进一步改善信誉。虽然EM信用评级可能会继续改善，但在EM经济体的增长速度快，而不是发达国家，并考虑到人均GDP与感知信誉之间的正相关性。

EMBIG多样化的成熟产量并蔓延到美国国债（％）

来源：JPMSI;数据到2012年9月20日

EMBIG average credit rating

Source: JPMSI, JPMAM; data as of July 2012; ratings expressed on arithmetic scale with lower numbers implying higher ratings

Even if spreads are not expensive, though, the extraordinary atmosphere in the U.S. Treasury market is leaving the all-in EMD yield at strikingly low levels even by recent standards. The EMBIG-Div yields just 4.6 percent at the moment, a figure historically more associated with investment-grade U.S. corporates or even Treasuries themselves. The low level of yields can create a sense of sticker shock, not just in EMD but throughout the fixed-income universe (something similar has happened in high yield, for example, which stands barely above 6 percent in yield-to-worst terms). In this context, though, another current feature of fixed-income markets bears attention: the low level of volatility. Implied volatility across the U.S. Treasury yield curve has faded throughout 2012 and is now running at less than 60 percent of its long-run average – a level comparable to the one prevailing in the mid-2000s, during the so-called “Great Moderation.”

MOVE (U.S. Treasury implied volatility)

Source: Bloomberg; data through September 20, 2012

What accounts for such low market volatility in a global atmosphere that feels turbulent? It appears that strong but opposing forces present in the Treasury market are constraining outcomes on either side, thus dampening volatility, a situation that may persist for some time. On the one hand, Treasuries are experiencing severe downward pressure on yields, both cyclical and structural. The macroeconomic environment favors low yields, with growth sluggish, central banks turning ever more stimulative, and genuine inflation fears remote. Meanwhile, a safe-asset shortage appears to have developed in recent years with demand for risk-free securities elevated and the supply of such assets having shrunk. The Fed’s recent action reinforced these points. Not only did the FOMC anchor short-term rates near zero for an even longer period than before, it made this pledge somewhat less sensitive to the near-term growth outlook. Meanwhile, the resumption of asset purchases suggests that the Fed will be taking duration out of the market for an extended period.

与此同时，财政部可能面临实际的地板，一个不低于今年达到的水平。基于U.S.面对2％的通胀环境的投资者可能不接受10年期货费的低于1.50％的收益率。和2年的产量为0.25％，没有更远的落下。因此，国债收益率陷入了三明治，具有强烈的向下影响，但空间很小。在这种受限制的市场结果的氛围中，暗示挥发性下降是有道理的。

If this low-volatility environment continues, EMD yields that appear modest by medium-term standards become more interesting. In a low-vol world, a 4.5% yield with minimal defaults and improving credit trends may produce an attractive Sharpe ratio. Investors who accept the premise that low-vol may be here to stay, at least for a while, may need to consider modifying their thinking about yield levels in that looks increasingly like a coupon-clipping world.