May 15, 2020

Emerging market fixed income - development and characteristics of the asset class

In this paper, we look at the evolution and characteristics of the Emerging Market (EM) fixed income asset class, since the 1980s, drawing on FTSE Russell data. We find EM fixed income is now a substantial and investible asset class and very different from the asset class that suffered major dislocation in 1997-98, with little contagion in recent years. Empirical evidence, including the Great Lockdown, does not support the view that EM fixed income is a pure risk-on asset. The variable correlations of returns with other assets offer portfolio diversification benefits. This evidence helps debunk some of the frequent misperceptions associated with EM fixed income.

- The COVID-19 shock is a major challenge for Emerging Markets, as it is for all markets. IMF and World Bank support for EM economies is developing and G7 central banks have already moved to ease strains on global dollar liquidity

- The scale of the crisis may require some relaxation in IMF conditionality, and further increase in SDR allocations, since the shock is deeper than the GFC

- EM fixed income benefited from QE spillover effects after the GFC, and the global search for yield, which is greater now, given the universe of negative yielding bonds