Are emerging market investment-grade bonds still worth the risk?

Once the darling of bond investors as Fed rates tended towards negative territory, rising 10-year US treasury yield rates have seen investors take a second look at emerging market investment-grade (EM IG) bonds. Once a “best of both worlds” option with high yields at relative safety, duration risks, unattractive valuations and tight spreads have weakened their lustre. 

“Given the firm performance of EM IG bonds in 2020, we believe that valuations relative to EM High Yield (HY) have become less attractive. EM IG also has a significantly higher duration relative to HY and therefore is more susceptible to the impact from rising rates, and finally the tighter spreads in EM IG also results in a smaller buffer against rising rates,” says Eli Lee, head of investment strategy at Bank of Singapore (BOS). 

This prognosis comes amid a healthy US jobs report last Friday, with markets optimistics that good times are coming back. Higher inflation and economic expectations thus drove rock-bottom 10-year US Treasury yields to the lofty heights of 1.60%. The BOS economics team have moved their 12-month forecast for 10-year US Treasury yields to 1.90% on the back of bullishness on the US economy. 

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