Navigating Emerging Market Debt: Risks and Opportunities in Focus

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Is the long-term case for emerging market debt still intact?

The article discusses the state of emerging market (EM) debt amid current macroeconomic conditions. Key points are the strong fundamentals in major EM countries and the undervalued exchange rates in local currency debt, which can serve as buffers against potential volatility. The author, Kirstie Spence, also expresses a preference for local currency bonds, particularly in Latin America where countries have implemented early interest rate hikes.

Understanding Local and Hard Currency Bonds

Spence elaborates on the advantages of local currency bonds. She explains that these bonds reflect global inflation challenges, but their yields also indicate that many emerging markets are ahead of the curve. Central banks in these countries are likely to ease rates, providing a tailwind for returns. Spence further articulates that local currency bonds offer more resilience and are more closely tied to their countries’ fiscal, monetary, and macroeconomic policies. She concludes by mentioning potential opportunities within the dollar space, albeit on a more individual credit selection basis.

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