Emerging market debt (EMD) recently had a rough month, with the Bloomberg Barclays Emerging Markets Sovereign Index losing 3.3% from April 18–May 18, 2018. The index currently yields almost 6.2%, its highest level since early 2016, and the spread to comparable Treasuries has also increased back to mid-2016 levels near 3.1%, as shown in Figure 1. However, before we can determine if EMD represents an opportunity at current levels, it is important to look at the major causes of recent weakness, which include rising yields, a stronger dollar, and the continued potential for trade disruptions.

Rising Yields and Dol

The U.S. dollar has come back strongly. After losing nearly 10% in 2017 and an additional 4% in January, the U.S. Dollar Index has rallied more than 5% off of its February lows [Figure 1]. Gains have been driven by several factors, particularly rising U.S. interest rates, partially due to increasing Federal Reserve (Fed) rate hike expectations, and repatriation of overseas profits as prescribed by the new U.S. tax law. Weakness in emerging market (EM) currencies as a result of several flare-ups in trouble spots such as Turkey and Argentina, along with the populist wave in Italy, have added to support for the dollar. The dollar is important fo

We continue to prefer emerging market (EM) equities in tactical asset allocations. EM equities have given back strong early-year gains, pushing the MSCI EM Index into negative territory year to date on a total return basis. Many headwinds have weighed on EM stocks, including rising interest rates, U.S. dollar strength (and related weakness in EM currencies), and trade war fears. Here we highlight five keys to our EM outlook.

Five Keys to EM Outlook

1. Interest rates and monetary policy. EM’s latest bout of underperformance began on April 1, when the latest move higher in the 10-year Treasury began [Figure 1]. Since April

The 10-year Treasury yield has been hovering between 2.8% and 3.0% for months, but finally closed at 3% on May 9, 2018. Since then, the benchmark rate has fallen slightly, though it remains in a tight range around the 3% level. So what does a 3% yield mean for markets? A round number like 3% can be psychologically important for markets, and does represent a more attractive yield for high-quality bond investors than they may be used to. However, it is also important to keep in mind that the impact of such a move, for both investors and borrowers alike, is limited, given that a 3% yield isn’t markedly different from the 2.8 – 3.0% r