Systematic Fixed Income

CHAPTER 7Security Selection – Emerging Markets (Hard Currency)

OVERVIEW

This chapter lays out the investment opportunity for emerging market fixed income. Although estimates on the size of emerging market fixed income vary considerably, this is a large and growing area. We will focus on hard currency bonds issued by sovereign and quasi‐sovereign entities. A hard currency bond typically refers to a USD denominated bond issued by an emerging market country. These bonds contain a risk‐free and a risky component, with the risky component being our area of focus. Security selection for credit excess returns in emerging market hard currency shares some similarities with security selection for credit‐sensitive assets generally, but data challenges mean our measures need to be modified. This chapter introduces a set of systematic investment themes and assesses their efficacy individually and in combination for emerging market hard currency bonds.

7.1 WHAT IS THE INVESTMENT OPPORTUNITY FOR EMERGING MARKET FIXED INCOME?

Obtaining clear estimates on the size of emerging market fixed income is difficult. Indices that are used as typical policy benchmarks for asset owners only include bonds that meet stringent index inclusion criteria. Countries are typically included only if the Gross National Income (GNI) is below a certain threshold (distinguishes emerging countries from developed countries). Bonds are typically included only if they are investible. A key use of benchmarks is for relative ...