Dollar-denominated bonds continue to languish

Dollar-denominated emerging market government bonds underperformed similarly-rated US dollar corporate bonds significantly in the recent sell-off. Most of this underperformance has not been unwound, even though sentiment towards emerging markets has improved: having risen from next to nothing on the eve of the publication of the minutes of the US FOMC meeting in May to around 85bp a month later, the gap between the “stripped” spread of the JP Morgan EMBI Global Index over US Treasuries and the spread of US BB-BBB-rated corporate bonds over US Treasuries has only shrunk to around 55bp.