(Bloomberg) -- As the yield advantage of emerging-market bonds over their developed counterparts widens, Egypt and Turkey stand out as winning bets, offering the highest inflation-adjusted returns.
With many of the developed world’s bond yields deep into negative territory, investors are looking past country-specific risk factors, such as anti-government protests in Egypt and discord between Turkey and the U.S. An added bonus is that slowing inflation in emerging markets has boosted their real yields.
“Buoyant real yields help make a stronger case for emerging-market bonds,” said Takeshi Yokouchi, a Tokyo-based senior fund manager at Sumitomo Mitsui DS Asset Management Co., which oversees the equivalent of $160 billion. “It’s a good time to start buying them as inflation in many of the economies has slowed and more rate cuts are expected for some of them.”
The extra real yields that emerging markets offer over developed nations held at 302 basis points in October, increasing almost five-fold since 2013Inflation-adjusted yields in advanced economies stand near the lowest level since at least 1997, based on data available. The Federal Reserve and the European Central Bank have been loosening policy, while the next move by the Bank Japan looks more likely to be easing than tighteningThe U.S. real yield stands at zero, while that for Germany is at minus 1.35% and Japan at negative 0.37%Emerging-market bonds have gained 1.7% in the past three months amid growing optimism over the first phase of a trade deal between the U.S. and China. Reduced demand for haven assets saw debt in developed economies lose 1%Despite offering the third-highest real yield among 24 markets, the returns on South African bonds have trailed other emerging markets. They lost 2.5% last week, the most since March 2017, as bailouts for state power company Eskom Holdings SOC Ltd. threatened to worsen the nation’s fiscal deficit and Moody’s Investors Service moved closer to downgrading the nation to junkTurkey’s local-currency sovereign debt climbed almost 1% this week through Thursday, South Africa rose 0.9% and Egypt up 0.4%
The real yields are calculated by subtracting the inflation rate from the average monthly yield of the 10-year local-currency sovereign debtThe EM real yield is the average rate of 24 developing economies in the Bloomberg Barclays Local Currency Government Universal Index, excluding ArgentinaThe DM real yield is the average of Group of Seven industrialized nations plus seven countries in the Bloomberg Barclays Global Treasury Index
Foreigners Buying More Longer-Term Debt in Egypt, SocGen SaysTurkey’s Inflation Turnaround Could Be Over as Surprises End Debt Trap Looms for South Africa as Eskom Saps State Coffers
(Updates with bond returns in the last bullet under Key Insights.)
--With assistance from Colleen Goko, Robert Brand, Constantine Courcoulas, Alex Nicholson, Paul Wallace and Garfield Reynolds.
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