Local Currency Debt
Local currency sovereign debt consists of government bonds issued in each country’s domestic currency. Local currency debt portfolios are most commonly benchmarked against the JP Morgan GBI-EM family of indexes. The GBI-EM Global Diversified consists of regularly traded, liquid fixed-rate, domestic currency government bonds of 19 countries from four geographic regions to which international investors can gain exposure.
Following a series of economic crises and high inflation in the 1980s and 1990s, emerging markets (EM) countries have made significant strides in improving their economic management, and thereby strengthening debt sustainability. A key factor supporting this important progress has been the growing independence of central banks from government. Ultimately, improvements to the banking systems have allowed many EM countries to issue debt in their domestic currency, helping to reduce vulnerability to exchange rate moves. As EM governments increasingly turn to their domestic markets for sources of finance, investors in search of higher yield and greater diversification are showing growing interest in local currency debt markets.
In our view, local currency sovereign debt is increasingly attractive as EM economies continue to mature through the adoption of sound fiscal and monetary policies. We believe improving credit quality and economic growth that are in excess of developed markets are the key drivers of currency appreciation, lower local interest rates, and high current yield, which carry the potential for strong returns.
Stone Harbor has been managing EM local currency debt since 2006.