(Bloomberg) — Emerging-market bonds and currencies were whipsawed by the Eurozone debt crisis 15 years ago, but they are now better equipped to withstand any repeat of that turmoil, analysts say.
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Developing nations have improved their fiscal positions in recent years, while their relatively high bond yields offer greater protection. Emerging-market central banks have also demonstrated their independence and earned investors’ trust by navigating previous episodes of upheaval, such as the pandemic.
Concern over potential contagion from the European bond woes has intensified in recent weeks as the extra yield investors demand to hold French bonds over their German peers climbed to the highest level since the regional debt crisis in 2011. Adding to those fears has been the surge in oil prices caused by the conflicts in the Middle East and Ukraine.
“Compared to 2011, EMs are better positioned today, with stronger fiscal dynamics, external balances, and high nominal yields that provide structural resilience,” said Carol Lye, a fund manager at Brandywine Global Investment Management in Singapore. Relatively light positioning in emerging-market currencies also mitigates the risk of any forced selling in a Eurozone contagion scenario, she said.
Brandywine’s confidence has led it to add to its holdings of Latin American currencies, while maintaining exposure to North Asian ones benefiting from artificial intelligence spending, Lye said.
The European debt crisis that escalated sharply in August 2011 heightened global risk aversion, prompting investors to favor safer assets and making emerging-market bonds and currencies vulnerable to sudden outflows. The extra yield investors received for holding developing-nation dollar bonds over Treasuries surged to as much as 447 basis points in October of that year, a level that was only surpassed in 2020 during the peak of the Covid pandemic. It is currently about 189 basis points.
This year though, emerging markets have outperformed their developed-market peers. While 10-year Treasury yields surged above 5% last month to the highest level since 2002, the yield on a Bloomberg index of global emerging-market local-currency debt closed Friday at 4.21% almost unchanged from a month earlier.
