Local currency rates and FX screen very attractive, while hard currency credit is neutral. In our Quarterly Valuation Update, we provide our Q4 assessment.
Hard currency debt valuations:
- Credit Spreads: Neutral
- The current excess spread of 146 bps is in our 2nd quintile of attractiveness.
- Historically, an excess spread in this quintile has been associated with a subsequent mean 2‑year annualized credit return of 1.0% (above the risk-free rate).
- This implies a valuations-based neutral assessment.
- Should post-restructuring countries be upgraded from D/CCC to B+, the excess spread would land in our attractive 3rd quintile. We find this scenario plausible and consistent with the history of sovereign restructurings.
- USD Rates: Neutral
- The U.S. Federal Reserve cut the fed funds rate twice during the quarter, and the USD interest rate curve steepened.
- Our “deviation from fair value” for USD interest rates shows an improvement in the attractiveness of USD duration, with current levels close to fair value.
Local currency debt valuations:
- FX: Very Attractive
- Our expected spot return indicator lands in the most attractive 4th quartile.
- Mean subsequent GBI-EMGD-weighted spot return has been +8.7% for the 4th quartile and +7.1% for the 3rd quartile.
- Local Rates: Very Attractive
- EM local rates maintained an attractive valuation gap versus U.S. interest rates.
- At 0.6%, this is in our most attractive 4th quartile, where the mean subsequent EM/U.S. return differential has been +2.7%.
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