Jumping for Emerging Markets Junk Bonds

The first quarter was kind to exchange traded funds holding U.S. high-yield corporate debt as default rates remain benign.

The iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK), the two largest U.S. high-yield bond ETFs, have remained sturdy despite rising anticipation the Federal Reserve will raise interest rates sooner than expected, speculation that has prompted elevated short interest in the two funds. [Junk Bond ETF Short Interest Surges]

High-yield corporate debt from emerging markets issuers is catching investors’ attention as well, even with the spotlight on corporate defaults in China. Even with a 12.5% weight to China, by far its largest country allocation, the Market Vectors Emerging Markets High Yield Bond ETF (NYSEArca: HYEM) gained nearly 4% in the first quarter, outpacing comparable U.S.-focused ETFs along the way.

“Investors have stopped the wholesale selling and are starting to ask themselves where they can find value in EM debt,” said Market Vectors Fixed Income Portfolio Manager Fran Rodilosso. “I think there are many places to look for opportunities – hard currency or local market, investment grade or high yield, sovereign debt or corporates. This suggests sentiment may be turning.”

There are in fact opportunities with emerging markets corporate junk bonds. With a  30-day SEC yield that is nearly 260 basis points higher than HYG’s, HYEM effective duration of 3.98 years is not far off the 3.91 years sported by HYG. High-yield emerging markets corporates usually sport higher yields than their developing world sovereign peers and U.S. junk bonds. [It’s Not All Bad for EM Bond ETFs]