EMD was at the top of most investor surveys heading into 2021, but we have seen negative performance from the asset class so far this year. However, this volatility has been driven entirely by US interest rates, and the fundamental tailwinds behind EMD are still there, says Alejandro Arevalo, Head of EMD. The asset class looks very attractive compared to developed market fixed income, including high yield. Alejandro and his team believe it’s a great opportunity to make an allocation for the long term.

EMD performance has been driven by interest rates alone

At the turn of the year, the consensus was that 2021 was going to be a great year for emerging market debt (EMD). But it hasn’t turned out like that so far, with the asset class losing money in each of the first two months of the year. It’s important to recognise, however, that these losses have been caused entirely by rising US interest rates. EMD spreads1 have narrowed over this period. Higher quality, longer duration bonds have underperformed because their returns are more dependent on US rates.