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By Jason Stipp | 11-15-2010 10:46 AM

Gomez: Emerging Markets Bonds Can Continue to Outperform

PIMCO's Michael Gomez says they see great value in emerging markets local debt and Asian currencies versus the dollar.

Jason Stipp: I'm Jason Stipp for Morningstar. It's International Investing Week on Morningstar.com, and today we're focused on the emerging markets.

I've got on the phone with me today, Michael Gomez from PIMCO Emerging Local Bond, and he is going to tell us a little bit about he is seeing in the emerging-markets bond space.

Michael, thanks so much for calling in today.

Michael Gomez: Thank you so much for having me.

Stipp: First question for you, the category returns in the emerging markets bond category have been very good over a several trailing time periods. My question for you is, do you feel like this area of the market may be a bit overheated, maybe the market has gotten a little bit ahead of the fundamentals in the emerging markets bond space? What's your take on valuations today?

Gomez: Well, we still think that there is good value remaining in emerging markets fixed income. You're right that the total returns have been very strong. And in 2010 year-to-date, they are also very strong. But I think that we need to take a more granular look at different portions of the asset class and deconstruct where those returns are coming from.

So, if you look at the external debt portion of the asset class, what you see is that this is a very long duration asset class, over seven years of duration. And so the total returns have in large part been driven by the very strong rally that you've seen in U.S. Treasury yields and the associated tailwind that that's given to emerging-market external debt.

Spreads are only about 15 basis points tighter on the year. When you look at local markets, what we've seen is both the compression in local markets yield as fundamentals have started to exert themselves and also, more recently, you've seen a tailwind in terms of total returns coming from the currency side.

So, you're right to say that the returns have been strong, but our sense is that this is an asset class that can continue to outperform relative to the global fixed-income opportunity set.

Stipp: As you're looking out across your investment universe and your stomping grounds, are you finding any areas where the opportunity looks particularly compelling? And on the flipside, are there any areas where it looks like it may be time to trim or to be a little bit more cautious?

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