Will EM corporate bonds continue to outperform?

Emerging market dollar-denominated corporate bonds outperformed similarly-rated US corporate bonds in the second quarter of this year. We expect this outperformance to continue. Admittedly, bonds issued by emerging market companies are arguably more vulnerable than those issued by US companies if tighter Fed policy dulls investors’ appetite for risk. And the additional yield offered by emerging market dollar-denominated bonds over Treasuries has already declined sharply since last summer, lessening their outright appeal.

But we doubt the Fed will tighten monetary policy very aggressively. And the option-adjusted yield spread over Treasuries of BoAML’s U.S. Emerging Markets Liquid Corporate Plus Index (with a current rating of BBB) remains about 1.3 percentage points more than that of its BBB U.S. Corporate Index, which has also fallen sharply.