Eaton Vance
July 14, 2021
Eaton Vance provides advanced investing to forward-thinking investors, applying discipline and long-term perspective to the management of client portfolios.

EM debt at midyear: Looking forward from the second quarter's strong comeback

By: Emerging Markets Team 

Article published on: July 13, 2021

Boston  -  Continuing our series of midyear outlook blogs, our emerging markets team reviews the second quarter and highlights the importance of fundamental analysis to seek value among differentiated countries in the period ahead.

Emerging markets (EM) debt rallied back quite strongly during the second quarter, recouping much of the pullback of the first quarter, powered by a number of factors:

  • Fundamentals that remained on solid footing, in broad terms, with robust economic activity, helped by a continued rally across the commodity complex
  • Support from the IMF and other multilateral institutions
  • A relatively supportive macro backdrop with loose fiscal and monetary policy throughout much of the developed world
  • Subsiding volatility in the U.S. Treasury market, following a turbulent first quarter
  • A wide-open new-issue market, buoyed by demand for the EM debt sector

The inflation threat has spurred some EM central banks to hike rates, with markets continuing to price in more such moves — in some cases, aggressively. This combination has led to relatively steep yield curves in many countries and also provided additional support to currencies, which had been the strongest factor for EM for most of the period.

The rally cooled a bit toward the end of the quarter, as the U.S. Federal Reserve shifted to a slightly more hawkish tone at its June 16 meeting, prompting a strengthening of the U.S. dollar versus EM currencies.

  • EM local-currency debt  returned 3.54%, mostly driven by the strength of currencies versus the dollar and "carry" — the relative return advantage of the higher-yielding EM versus developed-market debt.
  • Dollar-denominated, hard-currency debt  benefited from rallying U.S. Treasury debt and tightening sovereign credit spreads, which were helped by the bullish factors noted above, and returned 4.06%.
  • Corporate EM debt  also benefited from the U.S. Treasury rally, plus corporate and sovereign credit spread compression, returning 2.10%.

EM debt stages a strong comeback in the second quarter
EMDq2recapmidyear0713snip
Sources: JP Morgan, Eaton Vance as of 6/30/21. The vertical axis reflects the amount contributed by each factor to total return — adding the bars above 0% and below 0% (negative numbers) results in the total return in the headline.  FX  is the gain or loss in the GBI-EM from currency changes relative to the U.S. dollar.  EURUSD  reflects the portion of currency movement in the GBI-EM that is explained by the change of the euro versus the U.S. dollar.  Rates  refers to the contribution of change in local-currency interest rates in the GBI-EM.  Carry  refers to the risk-free returns in each GBI-EM country that cannot be attributed to FX, EURUSD or rates.  Sovereign credit spread  refers to the spread above U.S. Treasurys in the EMBI paid by a country.  Corporate credit spread  is the spread above the sovereign spread paid by an EM corporate issuer.  US Treasury  refers to the contribution to return in the EMBI and CEMBI (both dollar-denominated indexes) due to interest-rate changes on the U.S. Treasury.

A look ahead

EM fundamentals and valuations remain appealing and support our belief in a neutral-to-slightly-bullish stance in the sector — the risk premiums available on EM debt are favorable to most other asset classes, in our view.

The real interest-rate differential between developed and emerging markets suggests EM debt is now offering attractive value. But there is a wide dispersion of inflation forecasts within EM countries, and some central banks are moving more aggressively to tighten policy. Russia, Brazil, Ukraine and Turkey are examples of where central banks have already hiked rates this year to help control inflation. It will be important to watch the dynamic between emerging and developed markets, as central banks and markets continue to calibrate inflation expectations.

More than a year after the start of the pandemic, COVID-19 still remains a dominant macro factor — one that continues to play out to various degrees across the EM sector, in many cases wreaking havoc on lives and livelihoods. Many countries have learned to live with the virus, but the rise of variant strains will continue to challenge such efforts.

One of the major milestones for the sector during the difficult pandemic market has been the differentiation by investors among countries and credits — it is no longer viewed monolithically. This is appropriate because while broad EM fundamentals are on solid footing, there are notable concerns over countries like El Salvador, Zambia and Belarus.

Bottom line:  With the global outlook for inflation and growth in flux, combined with the continuing impact of COVID-19, there has never been a more important time to rely on EM fundamental analysis and proprietary due diligence. More than ever, we believe this is the key to unlocking value in the EM sector.

J.P. Morgan Emerging Markets Bond Index (EMBI)  Global Diversified  is an unmanaged index of USD-denominated bonds with maturities of more than one year issued by emerging markets governments.

J.P. Morgan Government Bond Index-Emerging Markets (GBI-EM) Global Diversified  is an unmanaged index of local-currency bonds with maturities of more than one year issued by emerging markets governments.

J.P. Morgan Corporate Emerging Markets Bond Index (CEMBI) Broad Diversified  is an unmanaged index of USD-denominated emerging markets corporate bonds.

Data provided is for informational use only and should not be considered investment advice. Information has been obtained from sources believed to be reliable, but JP Morgan does not warrant its completeness or accuracy. The Indexes are used with permission. The indexes may not be copied, used, or distributed without JP Morgan's prior written approval. Copyright 2019, JP Morgan Chase & Co. All rights reserved.

 

 

All investing involves risk, including the risk of loss.

The value of investments may increase or decrease in response to economic, and financial events (whether real, expected or perceived) in the U.S. and global markets. Investments in foreign instruments or currencies can involve greater risk and volatility than U.S. investments because of adverse market, economic, political, regulatory, geopolitical, currency exchange rates or other conditions. In emerging or frontier countries, these risks may be more significant. Investments in debt instruments may be affected by changes in the creditworthiness of the issuer and are subject to the risk of non-payment of principal and interest. The value of income securities also may decline because of real or perceived concerns about the issuer's ability to make principal and interest payments. Exposure to derivatives involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other investments. As interest rates rise, the value of certain income investments is likely to decline. The value of commodities investments will generally be affected by overall market movements and factors specific to a particular industry or commodity, including weather, embargoes, tariffs, or health, political, international and regulatory developments.

7/14/2021
Advisory Blog | EM debt at midyear: Looking forward from the second quarter's strong comeback | Eaton V
ance
https://funds.eatonvance.com/advisory-blog.php?post=em-debt-at-midyear-looking-forward-from-the-second-quarters-strong-comeback&sku=39223
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5
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7/14/2021
Advisory Blog | EM debt at midyear: Looking forward from the second quarter's strong comeback | Eaton V
ance
https://funds.eatonvance.com/advisory-blog.php?post=em-debt-at-midyear-looking-forward-from-the-second-quarters-strong-comeback&sku=39223
2
/
5
E
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s
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s
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e
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u
r
vie
w
.
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r
eal inte
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s
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r
ate
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ential bet
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een
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eme
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ging ma
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gge
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t
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s
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w
offe
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ing att
r
active
val
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e. B
u
t the
r
e i
s
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w
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d
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d
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s
pe
r
s
ion of inflation fo
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eca
s
t
s
w
ithin
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u
nt
r
ie
s
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d
s
ome cent
r
al bank
s
a
r
e moving mo
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e
agg
r
e
s
s
ively to tighten policy. R
u
s
s
ia, B
r
a
z
il, Uk
r
aine an
d
T
u
r
key a
r
e example
s
of
w
he
r
e cent
r
al bank
s
have al
r
ea
d
y
hike
d
r
ate
s
thi
s
yea
r
to help cont
r
ol inflation.
I
t
w
ill be impo
r
tant to
w
atch the
d
ynamic bet
w
een eme
r
ging an
d
d
evelope
d
ma
r
ket
s
, a
s
cent
r
al bank
s
an
d
ma
r
ket
s
contin
u
e to calib
r
ate inflation expectation
s
.
Mo
r
e than a yea
r
afte
r
the
s
ta
r
t of the pan
d
emic, COV
I
D-
1
9
s
till
r
emain
s
a
d
ominant mac
r
o facto
r
— one that contin
u
e
s
to play o
u
t to va
r
io
u
s
d
eg
r
ee
s
ac
r
o
s
s
the
E
M
s
ecto
r
, in many ca
s
e
s
wr
eaking havoc on live
s
an
d
livelihoo
d
s
. Many
co
u
nt
r
ie
s
have lea
r
ne
d
to live
w
ith the vi
r
u
s
, b
u
t the
r
i
s
e of va
r
iant
s
t
r
ain
s
w
ill contin
u
e to challenge
s
u
ch effo
r
t
s
.
One of the majo
r
mile
s
tone
s
fo
r
the
s
ecto
r
d
u
r
ing the
d
iffic
u
lt pan
d
emic ma
r
ket ha
s
been the
d
iffe
r
entiation by
inve
s
to
r
s
among co
u
nt
r
ie
s
an
d
c
r
e
d
it
s
— it i
s
no longe
r
vie
w
e
d
monolithically. Thi
s
i
s
app
r
op
r
iate beca
u
s
e
w
hile b
r
oa
d
E
M f
u
n
d
amental
s
a
r
e on
s
oli
d
footing, the
r
e a
r
e notable conce
r
n
s
ove
r
co
u
nt
r
ie
s
like
E
l Salva
d
o
r
, Zambia an
d
Bela
r
u
s
.
Bottom line:
With the global o
u
tlook fo
r
inflation an
d
g
r
o
w
th in fl
u
x, combine
d
w
ith the contin
u
ing impact of COV
I
D-
1
9
,
the
r
e ha
s
neve
r
been a mo
r
e impo
r
tant time to
r
ely on
E
M f
u
n
d
amental analy
s
i
s
an
d
p
r
op
r
ieta
r
y
d
u
e
d
iligence. Mo
r
e
than eve
r
,
w
e believe thi
s
i
s
the key to
u
nlocking val
u
e in the
E
M
s
ecto
r
.
J.P. Mo
r
gan
E
me
r
ging Ma
r
ket
s
Bon
d
I
n
d
ex (
E
MB
I
)
Global Dive
r
s
ifie
d
i
s
an
u
nmanage
d
in
d
ex of USD-
d
enominate
d
bon
d
s
w
ith mat
u
r
itie
s
of mo
r
e
than one yea
r
i
s
s
u
e
d
by eme
r
ging ma
r
ket
s
gove
r
nment
s
.
J.P. Mo
r
gan Gove
r
nment Bon
d
I
n
d
ex-
E
me
r
ging Ma
r
ket
s
(GB
I
-
E
M) Global Dive
r
s
ifie
d
i
s
an
u
nmanage
d
in
d
ex of local-c
u
r
r
ency bon
d
s
w
ith mat
u
r
itie
s
of mo
r
e than one yea
r
i
s
s
u
e
d
by eme
r
ging ma
r
ket
s
gove
r
nment
s
.
J.P. Mo
r
gan Co
r
po
r
ate
E
me
r
ging Ma
r
ket
s
Bon
d
I
n
d
ex (C
E
MB
I
) B
r
oa
d
Dive
r
s
ifie
d
i
s
an
u
nmanage
d
in
d
ex of USD-
d
enominate
d
eme
r
ging ma
r
ket
s
co
r
po
r
ate bon
d
s
.
Data p
r
ovi
d
e
d
i
s
fo
r
info
r
mational
u
s
e only an
d
s
ho
u
l
d
not be con
s
i
d
e
r
e
d
inve
s
tment a
d
vice.
I
nfo
r
mation ha
s
been obtaine
d
f
r
om
s
o
u
r
ce
s
believe
d
to
be
r
eliable, b
u
t JP Mo
r
gan
d
oe
s
not
w
a
r
r
ant it
s
completene
s
s
o
r
acc
u
r
acy. The
I
n
d
exe
s
a
r
e
u
s
e
d
w
ith pe
r
mi
s
s
ion. The in
d
exe
s
may not be copie
d
,
u
s
e
d
, o
r
d
i
s
t
r
ib
u
te
d
w
itho
u
t JP Mo
r
gan'
s
p
r
io
r
w
r
itten app
r
oval. Copy
r
ight
2
0
1
9
, JP Mo
r
gan Cha
s
e & Co. All
r
ight
s
r
e
s
e
r
ve
d
.
All inve
s
ting involve
s
r
i
s
k, incl
u
d
ing the
r
i
s
k of lo
s
s
.
7/14/2021
Advisory Blog | EM debt at midyear: Looking forward from the second quarter's strong comeback | Eaton V
ance
https://funds.eatonvance.com/advisory-blog.php?post=em-debt-at-midyear-looking-forward-from-the-second-quarters-strong-comeback&sku=39223
3
/
5
PR
I
N
T
S
H
AR
E
The val
u
e of inve
s
tment
s
may inc
r
ea
s
e o
r
d
ec
r
ea
s
e in
r
e
s
pon
s
e to economic, an
d
financial event
s
(
w
hethe
r
r
eal,
expecte
d
o
r
pe
r
ceive
d
) in the U.S. an
d
global ma
r
ket
s
.
I
nve
s
tment
s
in fo
r
eign in
s
t
r
u
ment
s
o
r
c
u
r
r
encie
s
can involve
g
r
eate
r
r
i
s
k an
d
volatility than U.S. inve
s
tment
s
beca
u
s
e of a
d
ve
r
s
e ma
r
ket, economic, political,
r
eg
u
lato
r
y, geopolitical,
c
u
r
r
ency exchange
r
ate
s
o
r
othe
r
con
d
ition
s
.
I
n eme
r
ging o
r
f
r
ontie
r
co
u
nt
r
ie
s
, the
s
e
r
i
s
k
s
may be mo
r
e
s
ignificant.
I
nve
s
tment
s
in
d
ebt in
s
t
r
u
ment
s
may be affecte
d
by change
s
in the c
r
e
d
it
w
o
r
thine
s
s
of the i
s
s
u
e
r
an
d
a
r
e
s
u
bject to the
r
i
s
k of non-payment of p
r
incipal an
d
inte
r
e
s
t. The val
u
e of income
s
ec
u
r
itie
s
al
s
o may
d
ecline beca
u
s
e of
r
eal o
r
pe
r
ceive
d
conce
r
n
s
abo
u
t the i
s
s
u
e
r
'
s
ability to make p
r
incipal an
d
inte
r
e
s
t payment
s
.
E
xpo
s
u
r
e to
d
e
r
ivative
s
involve
s
r
i
s
k
s
d
iffe
r
ent f
r
om, o
r
po
s
s
ibly g
r
eate
r
than, the
r
i
s
k
s
a
s
s
ociate
d
w
ith inve
s
ting
d
i
r
ectly in
s
ec
u
r
itie
s
an
d
othe
r
inve
s
tment
s
. A
s
inte
r
e
s
t
r
ate
s
r
i
s
e, the val
u
e of ce
r
tain income inve
s
tment
s
i
s
likely to
d
ecline. The val
u
e of commo
d
itie
s
inve
s
tment
s
w
ill gene
r
ally be affecte
d
by ove
r
all ma
r
ket movement
s
an
d
facto
r
s
s
pecific to a pa
r
tic
u
la
r
in
d
u
s
t
r
y o
r
commo
d
ity, incl
u
d
ing
w
eathe
r
, emba
r
goe
s
, ta
r
iff
s
, o
r
health, political, inte
r
national an
d
r
eg
u
lato
r
y
d
evelopment
s
.
R
E
AD L
E
SS
E
me
r
ging Ma
r
ket
s
Team
E
aton Vance
Management
"The inflation th
r
eat ha
s
s
p
u
r
r
e
d
s
ome
E
M cent
r
al bank
s
to hike
r
ate
s
,
w
ith ma
r
ket
s
contin
u
ing to p
r
ice in
mo
r
e
s
u
ch move
s
— in
s
ome ca
s
e
s
, agg
r
e
s
s
ively. Thi
s
combination ha
s
le
d
to
r
elatively
s
teep yiel
d
c
u
r
ve
s
in
many co
u
nt
r
ie
s
an
d
al
s
o p
r
ovi
d
e
d
a
d
d
itional
s
u
ppo
r
t to c
u
r
r
encie
s
,
w
hich ha
d
been the
s
t
r
onge
s
t facto
r
fo
r
E
M fo
r
mo
s
t of the pe
r
io
d
."
7/14/2021
Advisory Blog | EM debt at midyear: Looking forward from the second quarter's strong comeback | Eaton V
ance
https://funds.eatonvance.com/advisory-blog.php?post=em-debt-at-midyear-looking-forward-from-the-second-quarters-strong-comeback&sku=39223
4
/
5
To
r
epo
r
t a
w
eb
s
ite v
u
lne
r
ability, plea
s
e go to
Re
s
pon
s
ible Di
s
clo
s
u
r
e
.
E
aton Vance i
s
pa
r
t of Mo
r
gan Stanley
I
nve
s
tment Management, the a
s
s
et management
d
ivi
s
ion of Mo
r
gan Stanley.
Thi
s
image in
d
icate
s
content
d
e
s
igne
d
s
pecifically fo
r
Financial A
d
vi
s
o
r
s
/
I
nve
s
tment P
r
ofe
s
s
ional
s
. Thi
s
mate
r
ial i
s
not to be
u
s
e
d
w
ith the p
u
blic.
Befo
r
e inve
s
ting in any
E
aton Vance f
u
n
d
, p
r
o
s
pective inve
s
to
r
s
s
ho
u
l
d
con
s
i
d
e
r
ca
r
ef
u
lly the inve
s
tment objective(
s
),
r
i
s
k
s
, an
d
cha
r
ge
s
an
d
expen
s
e
s
. Fo
r
open-en
d
m
u
t
u
al f
u
n
d
s
, the c
u
r
r
ent p
r
o
s
pect
u
s
contain
s
thi
s
an
d
othe
r
info
r
mation. To obtain a m
u
t
u
al f
u
n
d
p
r
o
s
pect
u
s
o
r
s
u
mma
r
y p
r
o
s
pect
u
s
an
d
the mo
s
t
r
ecent ann
u
al an
d
s
emiann
u
al
s
ha
r
ehol
d
e
r
r
epo
r
t
s
, contact yo
u
r
financial a
d
vi
s
o
r
o
r
d
o
w
nloa
d
a copy
h
e
r
e
. Rea
d
the p
r
o
s
pect
u
s
ca
r
ef
u
lly befo
r
e yo
u
inve
s
t o
r
s
en
d
money. Fo
r
clo
s
e
d
-
en
d
f
u
n
d
s
, yo
u
s
ho
u
l
d
contact yo
u
r
financial a
d
vi
s
o
r
. To obtain the mo
s
t
r
ecent ann
u
al an
d
s
emi-ann
u
al
s
ha
r
ehol
d
e
r
r
epo
r
t fo
r
a clo
s
e
d
-en
d
f
u
n
d
contact yo
u
r
financial
a
d
vi
s
o
r
o
r
d
o
w
nloa
d
a copy
h
e
r
e
. Befo
r
e p
u
r
cha
s
ing any va
r
iable p
r
o
d
u
ct, con
s
i
d
e
r
the objective
s
,
r
i
s
k
s
, cha
r
ge
s
, an
d
expen
s
e
s
a
s
s
ociate
d
w
ith the
u
n
d
e
r
lying
inve
s
tment option(
s
) an
d
tho
s
e of the p
r
o
d
u
ct it
s
elf. Fo
r
a p
r
o
s
pect
u
s
containing thi
s
an
d
othe
r
info
r
mation, contact yo
u
r
inve
s
tment o
r
in
s
u
r
ance p
r
ofe
s
s
ional. Rea
d
the p
r
o
s
pect
u
s
ca
r
ef
u
lly befo
r
e inve
s
ting.
H
E
A
D
Q
U
A
RT
E
RS
T
w
o
I
nte
r
national Place
Bo
s
ton, MA
0
2
1
1
0
I
n
v
e
s
t
m
e
n
t
s
E
aton Vance F
u
n
d
s
Pa
r
amet
r
ic F
u
n
d
s
Calve
r
t F
u
n
d
s
Sepa
r
ately Manage
d
Acco
u
nt
s
Clo
s
e
d
-
E
n
d
F
u
n
d
s
an
d
Te
r
m T
r
u
s
t
s
I
n
s
i
g
h
t
s
A
d
vi
s
o
r
y Blog
Monthly Ma
r
ket Monito
r
Ma
r
ket Up
d
ate
E
vent
s
E
aton Vance on Wa
s
hington
Ma
r
ket Vie
w
s
The A
d
vi
s
o
r
I
n
s
tit
u
te
T
a
x
e
s
&
T
o
o
l
s
I
nve
s
tment Tax Cente
r
Tax
I
nfo
r
mation
I
nve
s
tment Tax Calc
u
lato
r
La
d
d
e
r
e
d
I
nve
s
ting
I
nte
r
e
s
t Rate
Scena
r
io Tool
Concent
r
ate
d
Stock Po
s
ition
Calc
u
lato
r
Tax-
E
q
u
ivalent Yiel
d
Calc
u
lato
r
Re
s
o
u
r
c
e
s
M
u
t
u
al F
u
n
d
Sale
s
Cha
r
ge
s
Pa
r
amet
r
ic Sale
s
Cha
r
ge
s
Fo
r
m
s
&
E
-Delive
r
y
F
u
n
d
Co
r
po
r
ate Gove
r
nance
M
u
t
u
al F
u
n
d
s
& Aban
d
one
d
P
r
ope
r
ty
DST Vi
s
ion
A
d
vi
s
o
r
Cent
r
al
Acce
s
s
ibility
B
u
s
ine
s
s
Contin
u
ity
P
r
ivacy & Sec
u
r
ity
Te
r
m
s
& Con
d
ition
s
Ca
r
ee
r
s
Contact
I
nve
s
to
r
Acco
u
nt Acce
s
s
7/14/2021
Advisory Blog | EM debt at midyear: Looking forward from the second quarter's strong comeback | Eaton V
ance
https://funds.eatonvance.com/advisory-blog.php?post=em-debt-at-midyear-looking-forward-from-the-second-quarters-strong-comeback&sku=39223
5
/
5
N
OT FD
I
C
I
N
SUR
E
D | OFF
E
R
N
O BA
N
K GUARA
N
T
E
E
| MAY LOS
E
VALU
E
|
N
OT
I
N
SUR
E
D BY A
N
Y F
E
D
E
RAL GOV
E
R
N
M
E
N
T AG
E
N
CY |
N
OT A D
E
POS
I
T
E
aton Vance
d
oe
s
not p
r
ovi
d
e tax o
r
legal a
d
vice. P
r
o
s
pective inve
s
to
r
s
s
ho
u
l
d
con
s
u
lt
w
ith a tax o
r
legal a
d
vi
s
o
r
befo
r
e making any inve
s
tment
d
eci
s
ion.
The info
r
mation on thi
s
Web page i
s
fo
r
U.S.
r
e
s
i
d
ent
s
only an
d
d
oe
s
not con
s
tit
u
te an offe
r
to
s
ell, o
r
a
s
olicitation of an offe
r
to p
u
r
cha
s
e,
s
ec
u
r
itie
s
in any j
u
r
i
s
d
iction
to any pe
r
s
on to
w
hom it i
s
not la
w
f
u
l to make
s
u
ch an offe
r
.
©
E
aton Vance Management. All
r
ight
s
r
e
s
e
r
ve
d
.
E
aton Vance open-en
d
m
u
t
u
al f
u
n
d
s
a
r
e offe
r
e
d
th
r
o
u
gh
E
aton Vance Di
s
t
r
ib
u
to
r
s
,
I
nc. T
w
o
I
nte
r
national Place,
Bo
s
ton, MA
0
2
1
1
0
. Membe
r
F
I
N
RA
/
S
I
P
C
P
u
blication
d
etail
s
: T
u
e
s
d
ay, J
u
ly
1
3
,
2
0
2
1
4:
0
0
PM
Page
I
D:
2
2
9
44 - http
s
://f
u
n
d
s
.eatonvance.com/a
d
vi
s
o
r
y-blog.php
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