Emerging markets bonds, including those denominated in local currencies, are among the asset classes viewed as vulnerable to the Federal Reserve raising interest rates.
However, that theory is not etched in stone and some emerging markets bond exchange traded funds can endure a more hawkish Fed.
After tumbling immediately following Election Day, the dollar-denominated funds such as the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB) to local currency fare such as the VanEck Vectors Emerging Markets Local Currency Bond ETF (NYSEArca: EMLC) have been steady performers this year.
If the Federal Reserve hikes rates, emerging market companies that borrowed overseas are more susceptible to foreign capital swings and could find it more difficult to refinance debt. Moreover, a strengthening dollar makes it costlier to pay off dollar-denominated bonds.
EMLC, which holds bonds denominated in local currencies, allocates about 23% of currency weight to bonds from Central and Eastern European issuers. Mexico is that ETF’s largest country weight, followed by Poland.