Emerging-market bonds: 2024 outlook

Local-currency emerging-market (EM) sovereign bonds have posted strong returns in 2023, outperforming their developed-market (DM) peers. Headline inflation has fallen significantly over the course of the year, enabling some EM central banks, especially those in Latin America, to cut rates and pushing down sovereign yields. Central banks in Asia (apart from China) have been more cautious with respect to rate cuts. 

Market participants are pricing in further rate cuts by central banks in Latin America and Eastern Europe next year, but not yet by those in Asia. While there may be less room for yields to come down in Asia, we nevertheless believe some Asian central banks will start cutting rates in the second half of the year. Falling headline inflation in the region, possible rate cuts in the US and a potentially weaker US dollar could encourage Asian central banks to ease monetary policy. We expect the weighted-average policy rate in emerging markets to fall from 7.5% (at 31 October) to 6.4% by the end of 2024. 

Based on our expectations, we believe the average local-currency EM sovereign yield will fall from 6.6% at 24 November to around 5.5% by the end of next year. Given their low correlation to developed-market bonds and their expected outperformance next year, local-currency EM sovereign bonds are an attractive source of portfolio diversification. We remain overweight in this asset class as we expect it to deliver a high-single-digit return in 2024.

We also have a positive outlook on EM corporate bonds as the high coupons they are providing increase the likelihood of positive returns next year. Hard-currency EM corporate bonds have also risen in value in 2023, performing in line with DM credit. Providing attractive yields (around 7.7% at 24 November), hard-currency EM corporate bonds represent an attractive source of carry. 

EM investment-grade corporate bonds do not appear particularly cheap relative to US investment-grade credit. Nevertheless, our positioning in EM credit is the same as in DM credit—overweight investment grade and underweight high yield. This is because we believe investment-grade firms will be better able to cope with higher refinancing costs than noninvestment-grade ones. We especially like Asian investment-grade bonds as their average spread differential relative to US investment-grade credit is in line with the long-term median, indicating a relatively stable and balanced risk premium in comparison to US corporate bonds.

In short, when it comes to hard-currency EM corporate bonds, it is important to focus on high-quality issues. We expect spreads to remain close to their current levels, ending 2024 at around 330bp. We expect Asian investment-grade corporate bonds to provide a high-single-digit total return in 2024.