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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