After rally, emerging market bonds no longer cheap

Singapore

AS emerging markets (EM) bonds hang on to their remarkable rally in 2016, one thing is clear: They are no longer cheap.

Optimists say a domestic recovery within EM economies is taking hold. Fears are also receding over external threats to the EM story, such as a China crash or a brisk Fed rate hike.

But the attraction of these bonds is less clear when one examines spreads, or the extra yield one needs to hold EM bonds compared to yields of safer bonds.

EM government US-dollar denominated debt is trading at a spread of 350 basis points (3.5 percentage points) relative to US Treasuries, said Abbas Ameli-Renani, global EM strategist at Paris-based asset manager Amundi.

"It's in the middle of the range of the past five years. The key question is whether 350 basis points can go to 250 basis points, which would be the bottom of the five-year range, taking us back to mid-2014 levels where oil prices we…