10 Aug 2016 1 min read

The giant crush of yields

By Emiel van den Heiligenberg

Investors are in a massive search for carry as an increasing percentage of the bond markets is generating negative yields. This, amongst other factors, has fuelled huge inflows into emerging market debt (EMD). We are long hard currency EMD and the position has benefited from this search for yield. We wonder, however, has EMD now become too expensive?


We ask ourselves three questions:


Q. Are EMD spreads tighter than the average of the last decade?

A. No. With the EMBI global diversified sovereign spread at 364bps, it is still at the top end of the interquartile range as shown in the chart below. This is not just about the mix of debt having changed: it is true for the high yield part of the index and is also true of the investment grade part of the index.


Yields image

Q. Are EMD spreads tighter relative to equivalently-rated corporate debt?

A. No. They’re clearly not as cheap as in 2013/14, but EMBI spreads are still nearly 40bps above equivalently-rated corporates (see below).

Yields image


Q. Are emerging market sovereign credits more likely to default than equivalently-rated corporate debt?

A. No … or at least, not historically. Over the last twenty years, 10% of high yield corporate issuers have defaulted over a five-year period. This compares to 5% for high yield sovereigns. There is nothing to suggest that ratings agencies are systematically more generous to sovereigns than corporates.


In light of this we are sticking with our long EMD position.

Emiel van den Heiligenberg

Head of Asset Allocation

Emiel is responsible for the overall strategic direction of the team’s investment and business strategy. He claims to have been a promising lightweight rower at university until French fries got the better of him. Reflecting his love for rowing in a team, he firmly believes that excellence can only be achieved by a great team made up of motivated individuals that are also eager to work together. To this end he is the self-proclaimed inventor of the verb 'teaming' to acknowledge that shaping a top team and culture of excellence is an ongoing process. Outside of work-family obligations, Emiel’s spare time is filled by a passion for shark diving and skiing. Prior to dedicating his career to portfolio management in 1996, Emiel worked as a policy adviser in the Dutch Ministry of Finance and he graduated from Tilburg University in the Netherlands ages ago. When not glued to his Bloomberg screens, this Dutch man is hooked on computer games, peanut butter and his favourite dark beer made by Belgian monks.

Emiel van den Heiligenberg