Based on the MSCI report data for February 2024 MSCI Indexes, the MSCI EM Sovereign Bond Index (USD) provided an annualized return of 5.21 percent over the period from January 1, 2006, to January 2, 2024, outperforming both the MSCI U.S. Government Bond Index (USD) at 2.73 percent and the MSCI Eurozone Government Bond Index (USD) at 2.49 percent. The correlation between the EM Sovereign Bond Index and the U.S. and Eurozone Government Bond Indexes is 0.35 and 0.42, respectively, indicating potential diversification benefits when including the EM index in a portfolio mix. One excellent factor is the high risk-adjusted return of EM bonds, which is significantly better than the other two indexes.
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The MSCI Emerging Markets Sovereign Bond Index comprises 53 countries, with the total notional debt increasing from just over $200 billion in 2006 to $1.1 trillion in 2024. Notable changes in the index composition include a surge in Saudi Arabia’s weight from 7.3 percent in 2023 to 8.9 percent in 2024 due to new bond issuances totaling $21.5 billion. Among the countries depicted in the report, Malaysia has the lowest credit spreads for those with foreign government debt, while China has the lowest percentage of foreign debt. However, Malaysia’s foreign debt accounts for only 2.8 percent of its total government debt. Egypt and Brazil have the highest debt as a percentage of GDP, at 88.5 percent and 85.3 percent, respectively. Turkey is an exception to the fiscal discipline observed in other large sovereign issuers, as it has the highest credit spread among the prominent issuers shown in the report. This is applicable for both domestic and foreign issuers. Since its inception in 2006, the MSCI Emerging Markets Sovereign Bond Index has delivered an annualized return of 5.21 percent (total return of 149 percent) with an annualized volatility of 8.38 percent. Funds linked to this index have been a valuable tool for investors to access the risk premium associated with hard-currency debt in emerging markets.
*The credit spread of a country is calculated as the weighted average of duration-adjusted OAS (option-adjusted spread) within sovereign bonds from this country. OAS credit spread is the yield spread of a bond over the benchmark yield curve, usually adjusted to a US Treasury securities yield, after accounting for the embedded options. Embedded options are call/put and sinking fund provisions that can impact future cash flows and duration of bonds. For a more detailed understanding of the index methodology and additional insights, please refer to the MSCI report.
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