Bank of America said emerging market corporate bonds delivered a negative return of 0.9% in July as increases in U.S. Treasury yields more than offset largely steady credit spreads. The bank highlighted that 5-year and 10-year Treasury yields rose by 15 basis points and 27 basis points respectively during the month, while aggregate emerging market corporate spreads tightened by 2 basis points.
The performance gap between quality bands was notable. Investment grade emerging market corporates returned negative 1.1% for July, compared with negative 0.3% for emerging market high yield. Within the high yield cohort, regional returns varied: Asia produced a small positive return of 0.1%, Europe, Middle East and Africa returned negative 0.3%, and Latin America returned negative 0.4%.
On spreads, Bank of America reported an apparent 12 basis point tightening in emerging market high yield spreads for July. The bank cautioned that this headline figure was affected by Braskem leaving the index following a default. Excluding Braskem, high yield spreads still recorded a modest 2 basis point tightening. The reported tightening was underpinned in part by an 11 basis point tightening in Latin America high yield spreads, while Europe, Middle East and Africa high yield spreads widened by 16 basis points amid geopolitical risk.
Against that backdrop, Bank of America maintained a tactical stance that favors selective high yield carry over long-duration investment grade bonds. The bank emphasized targeting credits where shorter duration and higher carry are supported by factors such as deleveraging, refinancing, asset backing or similar credit-strengthening dynamics.
Bank of America also presented historical sensitivity metrics, noting that over the past three years the average spread beta of emerging market high yield to U.S. Treasury yields was -0.31, versus -0.22 for emerging market investment grade. Regionally within high yield, Latin America showed the most negative spread beta at -0.35, compared with -0.28 for Europe, Middle East and Africa and -0.23 for Asia.
Finally, the bank reported trailing correlations to U.S. Treasury returns at the end of July. The 52-week correlation between emerging market investment grade and 10-year Treasury returns was 0.90, while the correlation between emerging market high yield and 5-year Treasury returns was 0.42.
Data points referenced in this report:
- Emerging market corporate bonds - July return: -0.9%
- 5-year U.S. Treasury yield change: +15 basis points
- 10-year U.S. Treasury yield change: +27 basis points
- Aggregate EM corporate spread change: -2 basis points
- Investment grade return: -1.1%; High yield return: -0.3%
- Regional high yield returns: Asia +0.1%; EMEA -0.3%; Latin America -0.4%
- EM high yield spreads headline tightening: -12 basis points (impacted by Braskem default); ex-Braskem: -2 basis points
- Latin America high yield spreads: -11 basis points; EMEA high yield spreads: +16 basis points
- Three-year average spread beta to U.S. Treasuries: EM HY -0.31; EM IG -0.22
- Regional HY spread betas: Latin America -0.35; EMEA -0.28; Asia -0.23
- 52-week trailing correlation: EM IG vs 10-year Treasury = 0.90; EM HY vs 5-year Treasury = 0.42