EM: the relative appeal of EM EUR bonds over USD bonds

En bref

EM external debt has experienced a significant sell-off that has accelerated recently. EM debt yield has reached new highs since the GFC, and EM EUR debt index has been recently underperforming EM USD debt amid rising European recession worries.
Focal Point

Highlights:

  • The environment for EM external debt is facing many headwinds, that may persist over the next months. EM spreads will continue to widen. That said, total return in the second part of this year is likely to be positive thanks to the high carry. EM external debt remains a relative value and carry play.
  • EM EUR debt remains more attractive. Indeed,. EM EUR bonds are offering one of the largest pickups over EM USD bonds since January 2020.
  • We favour EM EUR IG bonds over EM EUR HY. EM EUR IG bonds are more defensive while they offer a large pickup over EM USD IG bonds. Moreover, EM HY dispersion is high and volatile.
  • At the country level, we see value across the curve in Romanian EUR bonds vs USD. In Mexico, the 5-10Y part of the EUR curve is more attractive than the USD curve. In Chile, EUR bonds offer a substantial pickup in the front end of the curve, mainly driven by global factors than local factors.
     

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EM: the relative appeal of EM EUR bonds over USD bonds
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