In his latest 'better business' column, Brendan McCurdy explains why, although emerging market debt investors may face a number of worries, history suggests the prospect of rising US rates should not hurt the asset class
Emerging market debt (EMD) can help diversify a portfolio and serve as a tool in the pursuit of yield and attractive risk-adjusted returns. The late 2016 sell-off has, however, raised a question for some investors - do rising US interest rates represent a new negative factor for emerging market debt?
We think the answer is no. While the possibility of nascent protectionism in the US and elsewhere is a risk we are watching closely, we believe fears of EMD sensitivity to US rates are overblown.
Instead, we think this asset class's fundamentals are more closely tied to global economic growth and individual country conditions - and that these larger forces may drive both duration moves and EMD performance.
We base that view on the historical performance record, which has not shown much relationship between EMD and rising US interest rates. In fact, as Exhibit 1 shows below, the J.P. Morgan EMBI Global Diversified index - a broad index of US dollar-denominated EMD - has risen in each of five rising 10-Year Treasury yield periods since inception.
In contrast, high-quality fixed income historically has often declined amid rising US rates. As Exhibit 2 shows below, the Bloomberg Barclays Global Aggregate Bond index - a broad basket of high-quality bonds - has shown relatively high sensitivity to US rates over time, which has not been true of EMD.
Brendan McCurdy is a vice president at Goldman Sachs Asset Management, leading the firm's Europe and Middle East Portfolio Strategy team of Strategic Advisory Solutions
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