- Emerging markets debt generally sold off during the third quarter, albeit with differentiation across segments. Concerns about the Delta variant of Covid-19, regulatory crackdowns in China, and a more-hawkish Fed than anticipated all contributed to weigh on investor sentiment. The commodity complex was mixed with energy prices increasing notably largely on a combination of supply-chain disruptions and weather effects in both Europe and China while much of the metals complex was weaker with concerns over the property sector in China. Fundamentals do appear to remain on solid footing in broad terms with continued economic expansion globally, higher commodity prices, a robust new-issue market, multilateral institutional support (e.g. the IMF), and a relatively supportive macro backdrop with loose fiscal and monetary policy throughout much
of the developed world.
- As it was around much of the world, inflationary pressures remain elevated in most EM countries. Perhaps different than most DM central banks, many EM central banks have been reacting with more orthodox monetary policy. This combination has led to relatively steep yield curves in many countries and also provided additional support to currencies.
- EM corporates were the best performing segment of the market producing a positive total return. The average spread tightened further during the quarter within the corporate segment despite notable widening in China. EM sovereign spreads widened during the quarter amidst negative sentiment, but remain not far off long-term averages. The rise in U.S. Treasury yields late in the quarter weighted on both of the hard-currency indices. In the local segment, both currencies and local rates continued their sell-offs that started late in the second quarter and caused the local segment to be the worst-performing.
- Inflows into EMD continued with approximately $3.6 billion net in during the quarter, but slowing notably from the pace of the first half of the year where we saw more than $50 billion net in.
- The new issuance market remained wide open, maintaining broad market access for countries across the credit quality spectrum and representing an important supportive factor for the asset class.