Sticking with hard currency bonds

While EM debt been on a strong run since last September, the local currency bonds have been lagging their hard currency peers since this past March. We expect this divergence to continue for two reasons. Firstly, the weakness in oil prices and EM trade flows should continue to weigh on global FX reserves. This should lead to more weakness in EM currencies, which is a better environment for USD-denominated EM debt. Secondly, despite slowing growth in EMs, real interest rates are near cycle highs, leaving room for additional rate cuts. This should also be supportive of hard currency debt.



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