Currency volatility and the impact of COVID have led to volatile returns for emerging market debt (EMD) in 2021. However, global growth and inflation are starting to slow and concerns have lessened over an adverse market reaction to the Federal Reserve withdrawing monetary accommodation.
So risks to EM local currency debt appear to have diminished. Relatively high yields, the fact that markets have already priced a considerable degree of policy tightening, and a still-overvalued USD create some potential for returns during the remainder of the year.
Emerging market debt (EMD) enjoyed a positive start to 2021 amid strong global growth and optimism that COVID would be less of an issue, as investor demand for risk assets surged. EMD saw particular interest given the high yield on offer. However, the spike in Treasury yields and the rebound in the USD asked questions of the emerging markets that they did not necessarily have answers to. Against a pandemic backdrop, high inflation (which pressured central banks to raise rates) and big swings in certain currencies undermined returns.
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