The weakening value of the dollar vis-a-vis foreign currencies is increasing the value of emerging market bonds, according to Societe Generale.
Essentially, while the Federal Reserve isn’t loosening policy further, emerging market banks are tightening. So currencies there are increasing in value. That means if you’re holding bonds from places like Brazil and India, and aren’t hedged against fluctuations in real or rupee, you’ll be seeing larger gains.
From Societe Generale:
Global EM bond spreads relative to US Treasuries returned to historical lows (210bp), leaving limited room for further gains in foreign currency denominated bond prices. But as EM central banks tighten more aggressively to fight inflation, local currency bonds should continue to benefit from currency appreciation as long as exposures are unhedged. We recommend nonetheless being very selective as the EM universe is not homogeneous.
Photo: Societe Generale