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Emerging government bond market timing

Emerging government bond market timing

15-01-2015 | Research

Research shows factors can help predict bonds returns in developed markets. But do they work for emerging markets bonds as well? Our findings suggest they do.

  • Johan Duyvesteyn
    Johan
    Duyvesteyn
    Senior Quantitative Researcher and Portfolio Manager
  • Martin Martens
    Martin
    Martens
    Head of Quant Allocation Research

Speed read

  • Factors can predict the interest rates of EM government debt in local currency.
  • An investment strategy based on the three factors outperforms after costs
  • EM local currency yields behave more like DM government bonds, less like credits
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Excess bond returns in developed markets are predictable using factors like bond momentum, equity momentum, and term spread. This paper,1 shows the same factors can also predict the interest rates of emerging government debt issued in local currency. An investment strategy based on the three factors delivers 1.2% outperformance per year after transaction costs.

The study also shows that emerging local currency debt excess returns have a correlation of 31% with U.S. Treasury returns, and a correlation of just 6% with US high-yield credit excess returns. These results indicate that emerging market local currency debt yields behave more like developed government bond debt and less like credits.

1Duyvesteyn, J. and Martens, M., 2014, ‘Emerging government bond market timing, The Journal of Fixed Income.

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