Emerging market bonds - brace for lower yields in 2018
But there are still pockets of opportunities where bond investors can seek value. By Neel Gopalakrishnan
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EMERGING market (EM) bonds have had a solid run for several years now (see chart below). The JP Morgan Asia Credit Index (JACI, a widely used index of Asian USD-denominated bonds) has returned a CAGR of around 7 per cent between January 2009 and December 2017.
However, investors will find 2018 a much more challenging year to replicate this kind of performance, especially as interest rates rise. Moreover, bond valuations, following years of solid performance, especially over the past two years, have become more expensive, reducing further upside (The JACI BBB index, for example, had a yield of around 3.8 per cent as at December 2017, compared to 4.3 per cent at the start of the year).
In this challenging environment, however, there are positive factors supporting bond performance. Firstly, continued high liquidity among market participants and the resultant search for yield provide some support for valuations. Secondly, credit fundamentals in Asia are still generally solid and default rates are expected to remain low.
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