The higher yields offered by emerging market bonds mean they often have a role to play in multi-asset portfolios, but with geo-political and economic uncertainty unusually high, developed market bonds represent a better opportunity, according to James Sullivan, head of partnerships at Tyndall Investment Management.
Sullivan, who oversees around £1bn alongside partner advice firms, said: “Emerging market bonds are a useful tool within a multi-asset portfolio, supported by relatively high nominal yields and improving fundamentals.
“In more benign macroeconomic environments, these characteristics can make EM debt an attractive source of carry.
“However, the current backdrop remains unusually uncertain with global growth risks, ongoing geopolitical tensions, sensitivity to US dollar movements, and the potential for a period of re-inflation. This leads us to conclude that EM assets remain more vulnerable than developed equivalents.”
He said his view was influenced by the return of positive real yields in developed market bonds, after a long period in which yields were negative in real – and at times nominal – terms.
Of current market conditions, Sullivan added: “It is also important to note that yield spreads across both emerging and developed bond markets are relatively tight by historical standards.
“This suggests that a large degree of optimism is already priced in and leaves less margin for error should growth disappoint, inflation re-emerge, or conditions tighten further. As a result, discipline remains critical regardless of geography.”
Tight spreads are a function of high prices and imply that the market is optimistic that inflation has been contained.
Sullivan said: “At this juncture, we believe that developed market bonds offer a more attractive balance of income, resilience, and risk control.”
He holds a similar view on equities, where he also prefers developed market assets to those in emerging markets for the same reason.