Investors in emerging market (EM) debt have traditionally pursued securities denominated in a hard currency, which seek to provide a source of returns in the form of credit spreads over U.S. Treasuries. But during the past two decades, the debt market of emerging economies has evolved beyond recognition and today features a far more robust sector of locally denominated securities (or local debt) that offer two potential sources for returns:
- Local interest rates, which can provide returns from carry and capital gains.
- EM currencies, which can provide returns from short-term carry and capital gains as they fluctuate against the U.S. dollar.
In our view, emerging market local debt can benefit fixed-income portfolios with diversification properties and attractive risk/return characteristics over time.
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Fixed income investing entails credit and interest rate risks. Interest rate risk is the risk that rising interest rates or an expectation of rising interest rates in the near future, will cause the values of a fund’s investments to decline. When interest rates rise, bond prices generally fall, and the value of a fund’s can fall. Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes, regulatory and geopolitical risks. Emerging and developing market investments may be especially volatile. Diversification does not guarantee profit or protect against loss.
These views represent the opinions of the Portfolio Manager(s) at OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.