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Public Fixed Income

EM Sovereign Debt: Spreads Are Tight... So What?

June 2024 – 5 min read

A superficial look at EM sovereign spreads suggests they may be too tight to offer attractive upside. We disagree, and here’s why.

A cursory look at EM sovereign debt over the past 20 years leaves most observers with the impression that spreads in the asset class are too tight and valuations are expensive, and therefore do not offer good risk-reward potential. Spreads of BBB, BB, and B-rated sovereigns are indeed testing multi-decade lows (Figure 1), which prompts two questions: Is a market “correction” likely, and if so, will potential returns be adequate?

Figure 1: EM Sovereign Spreads Test Multi-Decade Lows

em-sovereign-debt-spreads-1-web.jpgSource: J. P. Morgan. As of May 31, 2024.

If our analysis was limited to looking at spreads over the past 20 years, then we too might conclude that they are tight and that EM sovereign credit is expensive. However, a number of factors lead us to remain constructive on the asset class.

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Cem Karacadag

Head of Emerging Markets Sovereign Debt

Dr. Brian Mangwiro

Managing Director, Global Sovereign Debt & Currencies

Andrew Plunkett

Client Portfolio Manager, Global Sovereign Debt & Currencies Group

The document is for informational purposes only and is not an offer or solicitation for the purchase or sale of any financial instrument or service. The material herein was prepared without any consideration of the investment objectives, financial situation or particular needs of anyone who may receive it. This document is not, and must not be treated as, investment advice, investment recommendations, or investment research.

In making an investment decision, prospective investors must rely on their own examination of the merits and risks involved and before making any investment decision, it is recommended that prospective investors seek independent investment, legal, tax, accounting or other professional advice as appropriate.

Unless otherwise mentioned, the views contained in this document are those of Barings. These views are made in good faith in relation to the facts known at the time of preparation and are subject to change without notice. Parts of this document may be based on information received from sources we believe to be reliable. Although every effort is taken to ensure that the information contained in this document is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information.

Any forecasts in this document are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Any investment results, portfolio compositions and/or examples set forth in this document are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The composition, size of, and risks associated with an investment may differ substantially from any examples set forth in this document. No representation is made that an investment will be profitable or will not incur losses. Where appropriate, changes in the currency exchange rates may affect the value of investments.

Investment involves risks. Past performance is not a guide to future performance. Investors should not only base on this document alone to make investment decision.

This document is issued by Baring Asset Management (Asia) Limited. It has not been reviewed by the Securities and Futures Commission of Hong Kong.

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