The weakness continued in emerging markets for the third quarter as the JP Morgan GBI-EM Global Diversified Index (the "Index") fell -1.83%. The yield on the Index rose 3 basis points (bps) over the quarter to 6.62% while similar duration 5-yr maturity US Treasury bond yields rose 22 basis points to 2.95%.
Although yields rose modestly for the emerging market (EM) asset class, the return from local currency bonds was positive over the quarter at 0.24% due to the high carry earned on the index. Weaker emerging market currencies versus the US dollar drove the volatility over the period. Emerging market currencies contributed -2.06% to the Index return over the period.
The continued rise in US Treasury yields is a concern for fixed income investors especially when comparing US domestic fixed income to global fixed income opportunities. With rising US Treasury yields the spread between international bond yields and US domestic yields compress. The less attractive pick-up in yield on the face of it shows that foreign bonds are now more expensive or less of a value proposition, however, that may overlook some of the benefits of diversifying globally when it comes to fixed income.