Key Insights

  • Emerging market displays a positive outlook for investors as EM bonds continue to exhibit strong performance and growth.
  • Continued dispersion in annualised returns indicates opportunities for investors to take advantage of thorough active management.
  • Volatility levels of bonds are converging and condensing.
  • Chinese and Japanese markets offer the highest calendar year returns and continue to be attractive markets for investors.

Analysis of the bond market and performance

Across the bond market, emerging market bonds are exhibiting strong performance with EM USD experiencing a 10.81% annualised return which outperforms other bonds. Following EM, Global High Yield also experienced the strong performance with a 10.64% annualised return. Both Global High Yield and EM aggregate have delivered equity-like returns since 2010. Other EM bonds have also experienced the positive trend in growth, including EM Hard Currency and EM USD Aggregate exhibiting a positive outlook on the growth of the emerging market.

Furthermore, it can be observed that emerging market bonds are outperforming the global market due to high investor confidence in the growth of emerging markets. In addition to strong performance from emerging market bonds, Exhibit 1 also displays a diverging of bond growth across the market with an identifiable break-out trend across the graph. This pattern of expanding growth and optimistic bond performance is representative of a risk-on theme in the bond market. In risk-on environments, investors have a higher tendency to invest in high-risk investments.

With the interest rates at record lows, it is unlikely that capital growth will be a key driver of bond returns in the future. Investors looking for stable and defensive income streams from developed markets need to embrace absolute return strategies that focus on income. EMD still offers opportunities for duration position, however the volatility experienced by investors is much greater from EMD.

Exhibit 1: EM bonds offering the highest growth with EM USD outperforming the market

Check out complete report here.