Overview

Bank of America released its July assessment of emerging market (EM) corporate bond performance, indicating a preference for selective high‑yield exposure over longer‑duration investment‑grade (IG) bonds.

Market Performance

  • EM corporate bonds as a whole posted a 0.9% decline in July, driven by a 15‑basis‑point rise in the 5‑year Treasury yield and a 27‑basis‑point increase in the 10‑year Treasury yield, while aggregate EM corporate spreads narrowed by 2 basis points.
  • IG bonds fell 1.1% versus a 0.3% drop for high‑yield bonds. Within the high‑yield segment, Asia delivered a modest 0.1% gain, whereas Europe, the Middle East and Africa (EMEA) and Latin America posted declines of 0.3% and 0.4% respectively.

Spread Dynamics

  • EM high‑yield spreads tightened 12 basis points in July; after removing Braskem, which exited the index following a default, the net tightening was 2 basis points.
  • Latin America high‑yield spreads narrowed by 11 basis points, while EMEA high‑yield spreads widened by 16 basis points, reflecting heightened geopolitical risk.
  • Overall EM corporate spreads contracted by 2 basis points.

Relative Sensitivity to U.S. Treasuries

  • Over the past three years, the spread beta of EM high‑yield to U.S. Treasury yields averaged –0.31, compared with –0.22 for EM investment‑grade bonds.
  • Within high‑yield, the most negative beta was observed in Latin America (–0.35), followed by EMEA (–0.28) and Asia (–0.23).

Correlation with Treasury Returns

  • At the end of July, the trailing 52‑week correlation between EM investment‑grade returns and 10‑year Treasury returns stood at 0.90.
  • The corresponding correlation for EM high‑yield and 5‑year Treasury returns was 0.42.

Investment Preference

Bank of America reiterated its stance to favour selective high‑yield carry over long‑duration IG bonds, emphasizing credits where shorter duration and higher carry are supported by deleveraging, refinancing, asset backing, or similar factors.