Emerging Market Bond ETFs: Use Caution as Rates Rise

June 27th at 9:46am by Tom Lydon

Emerging market bond ETFs have been a popular destination for investors looking for extra yield but the funds have posted steep loses as U.S. Treasury rates rise on Federal Reserve tapering talk.

Developing market debt ETFs are oversold and could be due for a bounce, but some analysts say the long-term fundamental picture is clouded.

“[C]ontinued Fed tapering worries, concerns about rising interest rates in the U.S., and weaker than expected GDP growth for emerging market countries suggest investors should use caution when thinking about investing in emerging market fixed income,” said Todd Rosenbluth, S&P Capital IQ director of ETF research, in a note this week. [EM Corporates Providing No Shelter for ETF Investors]

“Record monetary stimulus emanating from developed market central banks in recent years disproportionately benefited emerging market assets,” he added.

However, now there are signs the Fed could soon pull back from monetary easing. Emerging market sovereign bond spreads over the 10-year U.S. Treasury have widened from 2.5% in January 2013 to above 3.7% in recent days. This move shows bond investors are reining in risk.

“Developing economies are also suffering from homegrown growth challenges ranging from stubbornly high inflation to widening trade deficits and popular unrest,” Rosenbluth added. [No Country for Bond ETF Investors]

Next page: A look at individual emerging market bond ETFs

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