Quarterly EM Debt Update | October 16, 2024

Valuation Metrics in Emerging Debt: 3Q24

EMD Quarterly Valuation Update

Local currency rates and FX screen attractive, while credit is neutral. In our Quarterly Valuation Update, we provide our Q3 assessment.

Hard currency debt valuations:

  • Credit Spreads: Neutral
    • The current excess spread of 149 bps is in our second quintile of attractiveness
    • Historically, an excess spread in this quintile has been associated with a subsequent mean 2‑year annualized credit return of 0.6% (above the risk-free rate)
    • This implies a valuations-based neutral assessment
  • USD Rates: Neutral
    • With the U.S. Federal Reserve cutting the Fed funds rate for the first time this cycle during the quarter, the USD interest rate curve bull-steepened
    • Our “deviation from fair value” for USD interest rates shows an improvement in the attractiveness of USD duration

Local currency debt valuations:

  • FX: Attractive
    • Our expected spot return indicator lands in the attractive third quartile
    • Mean subsequent GBI-EMGD weighted spot return has been +5.5% for the third quartile
  • Local Rates: Attractive
    • EM local rates maintained an attractive valuation gap versus U.S. interest rates even though the gap has narrowed
    • At 0.0%, this is in our third quartile, where the mean subsequent EM/U.S. return differential has been +1.1%  

 

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