Time to look at EM debt again?

The yield of the JP Morgan EMBI GD index – the USD denominated EM Sovereign Bond index – just breached the 10% mark yesterday, surpassing its 2008 peak and reaching its highest level since 2002. The adjustment year to date has been brutal – the index started the year with a yield of 5.27%, and has since seen a -25% price drop.

The significant change in composition of the index since then, with the inclusion of  a number of weaker countries makes direct comparison difficult, but it is fair to say that the market is now pricing a very negative macro scenario and a number of potential defaults / restructuring – the yield on the HY component of the market now stands at 14.4%, very close to its highest ever peak at 14.7% in 1998.

The average price of the bonds at the index level is now 81 cents on the dollar and 76 cents for the HY segment – with close to 30% of the bonds in the index trading at prices below 70.

While we may still see volatility in the short term, these level of yields have been associated in the past with strong return in the subsequent periods – might it be time to look at EM debt again?