Emerging Markets Bonds – Argentina Rejoins Index and Boosts Yield

In a somewhat accelerated fashion, Argentina recently became eligible for inclusion in the J.P. Morgan suite of GBI-EM indices. This follows a series of measures that have been implemented to facilitate foreign investor access to local government bond and currency markets. As a result, several Argentine peso-(ARS) denominated bonds were added to the J.P. Morgan suite of GBI-EM indices on February 28. The eye-popping aspect of the ARS bonds is their high yields, which are yield between 13.4% and 14.4% as of February 28. Argentina now represents approximately 3% of the GBI-EM Global Core Index (GBIEMCOR), and the net effect of its addition was more than 20 basis point boost in the overall yield of the Index to 6.75%.

Argentina Debt Boasts Substantial Yields

10-Year Local Currency Sovereign Bond Yields (%) As of 2/28/2017

Source: FactSet as of 2/28/2017. All performance quoted represents past performance. Past performance is no guarantee of future results.

Argentina’s Low Correlation May Provide Portfolio Diversification

A more interesting aspect of the ARS inclusion may be the effect of the political and economic dynamics of Argentina on the country’s foreign exchange rate. In short, since the ARS was liberalized at the end of 2015, it has exhibited an extremely low correlation to the J.P. Morgan GBI-EM Global Core Index coming in at 0.07 for the 14 months ending February 28, 2017 – making it an attractive from a diversification standpoint. It is likely, however, that by its very inclusion in the GBI-EM indices, the consequential impact on flows may increase the ARS correlation. However other currencies which are excluded from the tradeable and most benchmarked indices, such as the Indian rupee (INR) and the Chinese yuan (CNY), have shown much higher correlations than the ARS, as shown below (0.54 and 0.52 versus the GBI-EM Global Core Index).

We expect that Argentina’s net effect on the J.P. Morgan investable benchmarks to be, as a consequence, both additional yield and greater diversification.

Currency Correlations

January 1, 2016 – February 28, 2017

ARS – Argentine peso, BRL – Brazilian real, MXN – Mexican peso, RUB – Russian ruble, PLN – Polish zloty, DXY – U.S. Dollar Index, INR – Indian rupee, CNY – Chinese yuan. GBIEMCOR represents the J.P. Morgan GBI-EM Global Core Index, which is comprised of bonds issued by emerging market governments and denominated in the local currency of the issuer.

Important Definitions and Disclosures  

Sources of all data: FactSet, J.P. Morgan, and BofA Merrill Lynch. All data as of 2/28/2017.

Correlation measures the degree to which two securities move in relation to each other.

DXY represents the U.S. Dollar Index, which indicates the general international value of the USD. The index represents an average of the exchange rates between the USD and major world currencies.