EM foreign currency debt to perform badly, but crisis unlikely

We do not think that the downgrade of the Brazilian government’s foreign currency debt to “junk” status marks the beginning of a systemic emerging market (EM) sovereign debt crisis. But we do expect bond yields to rise in the months ahead as credit spreads widen and relatively aggressive interest rate hikes in the US push up Treasury yields. Our forecast for the yield on the EMBI+ Index to rise to around 8% by end-2017 is not of crisis proportions, but it does point to further negative returns.