What is the Emerging Market Bond Index (EMBI)?

What is the Emerging Market Bond Index (EMBI)?

The emerging markets bond index (EMBI) is a benchmark index for measuring the total return performance of international government and corporate bonds issued by emerging market countries that meet specific liquidity and structural requirements.

Despite their increased riskiness relative to developed markets, emerging market bonds offer several potential benefits such as portfolio diversity as their returns are not closely correlated to traditional asset classes.

Risks of Investing in Emerging Markets

1. Currency

Currencies of emerging markets are seen to be extremely volatile due to conversion rates. In particular, profits can be lessened if the conversion rate is low.

2. Politics

The political structure in emerging markets can be unstable. This can cause serious economic changes and leave the investor with a deficit.

3. Economy

The economic condition of emerging markets differs greatly from developed markets. It is shown through inflation, monetary policies, and low employment.

How the Emerging Markets Is Used

Emerging markets bond indexes are used as benchmarks for bond performance in emerging markets. The most popular emerging markets bond indexes are the JP Morgan EMBI+ Index, JP Morgan EMBI Global Index, and JP Morgan EMBI Global Diversified Index.

The EMBI+ Index measures Brady bonds, which are dollar-denominated bonds issued primarily by Latin American countries. The EMBI+ also includes dollar-denominated loans and Eurobonds and expands on J.P. Morgan’s original Emerging Markets Bond Index (EMBI), which was introduced in 1992 when it covered only Brady bonds.

Countries in the EMBI+ index are selected according to a sovereign credit rating level. The index is weighted on the basis of the market capitalization of government bonds, but it is the sub-index with the greatest liquidity requirements, so some markets are excluded. To qualify for index membership, the debt must be more than one year to maturity, have at least a $500 million outstanding face value, and meet stringent trading guidelines to ensure that pricing inefficiencies don’t affect the index.

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