The emerging-market corporate bonds denominated in US dollars have emerged as early winners for traders in 2024. These bonds are currently yielding higher returns than most other asset classes within the EM universe, with annualized gains of 12% in US currency terms. This performance is outpacing US corporate notes, narrowing the yield spread to the lowest level since June 2021.
The scarcity of EM corporate bonds in secondary trading has been driving prices up, with fewer issuances than expected. Unlike sovereign bonds, which saw active sales in January, companies are facing little pressure to raise dollar debt as refinancing needs have moderated and other fundraising avenues, such as local-currency debt, become available. Some companies are even returning capital to bondholders by buying back their debt.
Simon Cooke, a money manager at Insight Investment in London, noted, ‘Much better starting valuations when compared to US corporates, lower supply than expected, a series of buybacks and tenders, and a supportive macro backdrop have combined to push emerging-market corporate bonds to the top of the leader board.’
The Bloomberg EM USD Aggregate Corporate Index has extended its rally to a third month, reducing its average yield by 14 basis points in January. This performance comes at a time of volatility for emerging markets, with stocks erasing $1.6 trillion of shareholder wealth.
The yield spread between emerging-market corporate bonds and the Bloomberg US Corporate Total Return Index has fallen to 174 basis points, the lowest since mid-2021. However, investors find this gap attractive for yield hunting, offering a yield pickup of 270 basis points over Treasuries.
Furthermore, bonds that were previously dumped by investors are now making a comeback. For example, securities of First Quantum Minerals Ltd. and Ukrainian companies are posting some of the best performances in their peer group, with notable returns this year.
Sergey Dergachev, head of emerging-market corporate debt at Union Investment Privatfonds GmbH in Frankfurt, highlighted that the bonds ‘offer great diversification in terms of country and sector exposure.’
