Emerging Government Bond Market Timing

Abstract

Excess bond returns in developed markets are predictable using factors like bond momentum, equity momentum, and term spread. The authors show the same factors can also predict the interest rates of emerging government debt issued in local currency. An investment strategy based on the three factors delivers 1.2% outperformance per year after transaction costs. They also show that emerging local currency debt excess returns have a correlation of 31% with U.S. Treasury returns, and a correlation of just 6% with U.S. high-yield credit excess returns. These results indicate that emerging market local currency debt yields behave more like developed government bond debt and less like credits.