Local currency rates and FX screen attractive, while credit is neutral. In our Quarterly Valuation Update, we provide our Q2 assessment.
Hard currency debt valuations:
Credit Spreads: Neutral +
- The current excess spread of 167 bps is in our second quintile of attractiveness, though very close to the third quintile.
- Historically, an excess spread in this quintile has been associated with a subsequent 2 year annualized credit return of 0.6% (above the risk-free rate). As a reference, the third quintile's mean return has been +4.0%.
USD Rates: Neutral
- The forward curve remains inverted, although less than last quarter.
- We find this pricing somewhat ambiguous in generating a clear outlook, so we remain neutral.
Local currency debt valuations:
FX: Attractive
- Our expected spot return indicator lands in the attractive third quartile.
- Mean subsequent GBI-EMGD weighted spot returns have been +5.5% for the third quartile and +1.4% for the second quartile.
Local Rates: Very Attractive
- EM local rates maintained an attractive valuation gap versus U.S. interest rates as inflation-related forecasts are falling faster in EM than in the U.S.
- At 0.7%, this is in our most attractive fourth quartile, where the mean subsequent EM/U.S. return differential has been +1.8%.
