Correspondence: Benoît Mercereau, Sinopia Asset Management, 75419 Paris Cedex O8, France. Tel: +33 1 58 13 50 18; Fax: +33 1 41 02 52 20; E-mail: benoit.mercereau@sinopia.fr

¹is Deputy Head of Investment Research — FX and Emerging Markets Fixed Income at Sinopia Asset Management. He joined Sinopia from the International Monetary Fund (IMF). He spent four years at the IMF advising governments on economic policy, mostly in the Asia/Pacific region. He has also worked in Taiwan analysing companies and graduated from Yale University with a PhD in Economics. He received his undergraduate degree from Ecole Polytechnique (France).

²is a quantitative analyst at Sinopia. She graduated from the Pantheon-Sorbonne University. Sinopia is an asset management specialist of HSBC, with about 45bn dollars under management (as of 2007, Q3).

Received 12 December 2007; Revised 12 December 2007.

Abstract

Emerging market government debt in local currency is a fast growing asset class. The asset class is new and it therefore offers attractive opportunities for active management. Good data and relatively stable economies make quantitative models for local currency debt reasonable. We suggest a valuation model for local currency debt. The model relates long-term interest rates to economic fundamentals. Our model explains emerging market interest rates reasonably well. An investment strategy based on the model seems promising. Our results suggest that models are useful for investing in emerging market local currency debt.