The positive momentum continued in the emerging market local currency debt asset class over the third quarter backed by strong investor fund inflows. We view the drivers for this trend to be the relatively cheap valuations, both across asset classes and historically, as well as the improving macro-economic environment spreading through many emerging markets.
As an indication, the most widely followed emerging market local currency benchmark, the JP Morgan GBI-EM Global Diversified index, returned 2.68% for the 3rd quarter and 17.07% year-to-date. The benchmark yield declined 14 basis points (bps) to 6.18% as of the end of the quarter. Over the same period, the yield on 5yr maturity U.S. Treasury bonds rose 15bps to 1.15%.
We believe there continues to be a strong case for adding emerging market exposure in this current environment. Emerging markets are growing faster than their developed market counterparts, and their central banks haven't been forced to print large sums of money and conduct massive quantitative easing programs. This bizarrely appears to place the balance of potential market risks more squarely in developed markets.
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