Local currency rates and FX screen very attractive, while hard currency credit is neutral. In our Quarterly Valuation Update, we provide our Q4 assessment.
Hard currency debt valuations:
- Credit Spreads: Neutral
- The current excess spread of 146 bps is in our 2nd quintile of attractiveness.
- Historically, an excess spread in this quintile has been associated with a subsequent mean 2‑year annualized credit return of 1.0% (above the risk-free rate).
- This implies a valuations-based neutral assessment.
- Should post-restructuring countries be upgraded from D/CCC to B+, the excess spread would land in our attractive 3rd quintile. We find this scenario plausible and consistent with the history of sovereign restructurings.
- USD Rates: Neutral
- The U.S. Federal Reserve cut the fed funds rate twice during the quarter, and the USD interest rate curve steepened.
- Our “deviation from fair value” for USD interest rates shows an improvement in the attractiveness of USD duration, with current levels close to fair value.
Local currency debt valuations:
- FX: Very Attractive
- Our expected spot return indicator lands in the most attractive 4th quartile.
- Mean subsequent GBI-EMGD-weighted spot return has been +8.7% for the 4th quartile and +7.1% for the 3rd quartile.
- Local Rates: Very Attractive
- EM local rates maintained an attractive valuation gap versus U.S. interest rates.
- At 0.6%, this is in our most attractive 4th quartile, where the mean subsequent EM/U.S. return differential has been +2.7%.
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Disclaimer: The views expressed are the views and understanding of the Emerging Country Debt team through the period ending January 2025 and are subject to change at any time based on market and other conditions. While all reasonable effort has been taken to ensure accuracy, no representation or warranty for accuracy is provided nor should be assumed. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities.
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