Real yields are much higher in EM vs DM, and the spread is the widest in 20 years.

‍With many EM central banks committing to hiking cycles and front-loading rate hikes to combat surging inflationary pressures, nominal yields have picked up significantly this year.

‍We looked at the "base rates" for investing in sovereign debt during hiking cycles - the conclusion is that it is usually better to wait before buying into sovereign debt.  The chart below shows the monthly total returns of Brazil local currency debt (in USD and BRL terms) and external USD debt, split by hiking regimes.  Hiking months represent about 20% of the total sample.

‍Local currency debt significantly underperforms in hiking regimes vs non-hiking regimes.  The base rate view tells us to wait for EMs to get close to the end of their hiking cycle before buying unhedged local currency debt.  Looking at growth leading indicators can highlight when markets overprice hikes and this is usually the best time to buy.

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