Portfolio Design: A Modern Approach to Asset Allocation

RETURNS ON EMERGING MARKET BONDS

In the last decade, emerging market bonds have become an increasingly important source of finance for emerging economies and an attractive asset for investors seeking international diversification. Emerging economies have been able to expand financing through newly issued Eurobonds, bonds syndicated and sold internationally, and through bond issues in traditional national bond markets.19 Most of these bonds are denominated in dollars, although bonds denominated in local currencies have become increasingly important.

TABLE 6.5 Emerging Market Bond Returns Compared with Other Returns, 1992–2009

Data Sources: Barclays Capital, Merrill Lynch, MSCI, and S&P.

FIGURE 6.8 Emerging Market Bond Spread (in Basis Points above U.S. Treasury Yield)

Data Source: Datastream.

The return series for emerging market bonds typically begin in the early 1990s after the Brady bonds were introduced. Table 6.5 reports the return on one such series, the Merrill Lynch Emerging Market Sovereign Plus index. This table compares emerging market bonds with U.S. dollar-denominated bonds, using the Barclays Capital Aggregate Bond Index (formerly the Lehman Aggregate Bond Index), and with two stock market indexes, the S&P 500 U.S. index and the MSCI emerging market stock index. The ...