Chart of the Day: EM Debt

The JPM EM Debt Index just posted one of its worst quarters since the Asian Financial Crisis. As growth slows across the developing world, currencies sell off and interest rates rise from all time lows, institutional investors have begun to question the relative attractiveness of emerging market assets. As illustrated below, long-term returns from EM Debt Indices tend to track starting yields.

PIMCO - EM Debt Starting Yields (Jul-13)

While the recent “spike” in rates is clearly visible at the far right of the chart above, this move appears minuscule, from a long term perspective; and if spreads were to widen to levels seen during previous episodes of crisis, recent losses in emerging market assets would appear minuscule in relation to what lies ahead.  Given that the speed of credit expansion in China exceeds that experienced prior to other crises, it doesn’t take much of an imagination to get there, particularly when one considers the scale of the problem – in a span of five years, the expansion in Chinese credit has been on par with the size of the entire US banking system.  Bottom Line:  There are better alternatives for yield-seeking investors today, which look much more attractive on a risk-adjusted basis.  We will be discussing one such investment in a letter to investors this week.  If interested, click here to subscribe to our research or to update your subscription preferences.