Will EM bonds continue to underperform?

Local currency government bonds in developed economies have typically fared much better than those in emerging economies over the past year. This is evidenced by the fact that the yield of the JP Morgan GBI Broad Index of developed market bonds has fallen by more than 40bp, whereas the yield of its emerging market equivalent, the JP Morgan GBI-EM Broad Index, has risen by more than 10bp. Indeed, this shift of more than 50bp has caused the gap between the two yields to increase to around 4.6 percentage points, which is close to its largest since the financial crisis. Looking ahead, though, we think the gap is likely to shrink.