Local currency EM bonds offer value

ON BONDS

M&G's Mike Riddell says although local currency emerging markets bonds offer value, investors must be wary of inflation concerns.

With emerging market assets rallying on the back of the commodity boom, the extra yield you get for lending to an EM country rather than the US government has shrunk to record tight levels in a number of countries. This discrepancy has become even more extreme in the credit derivative market, where for a brief time at the beginning of January, the risk of junk-rated Colombia defaulting was deemed to be smaller than the risk of France not repaying its debt. So valuations in most ‘hard currency’ bonds, bonds issued by EMs in dollars or euros look stretched. ‘Local currency’ EM bonds sti...