High-yield emerging market corporate bonds enjoy best time in more than a year

High yield corporate bonds provide yet another evidence that sentiment towards emerging market assets have shifted big time since February. We are basically eyeing reversal of last two/three years’ trend in global markets.

Dollar strengthened sharply since mid-2014 till early 2015 and was able to fend off gains throughout the year. Oil price drop coincided with strengthening of Dollar and emerging market debt deteriorated in the wake of vulnerabilities from China. Now investors are finding values in the opposite side of these movements as Dollar looks costlier and other cheaper.

Bank of America Merrill Lynch’s (BofAML) emerging market corporate option adjusted spread reached from 2.8% in mid-2014 to 5.1% in early 2016. Similarly high yield spread has jumped from 5.5% to 10.2%. But that trend is now reversing fast, leading to major relief for emerging market corporates. Corporate yield has eased 100 basis points February and high-yield spread has eased 220 basis points.

As rates ease, emerging market equities, (MSCI emerging markets) have rallied more than 23%, so if the trend reversal continues, which we expect to, at least for now, equities will rally further. According to BofAML global fund managers are still net underweight on emerging markets.