In the ongoing search for yields during a stubbornly low-rate environment, conservative investors have turned to riskier emerging market debt securities and bond-related exchange traded funds to meet income needs.
Year-to-date, the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB) attracted $857.6 million in net inflows, PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY) added $142.2 million and Vanguard Emerging Markets Government Bond ETF (NasdaqGM: VWOB) saw $124.7 million in inflows, according to ETF.com. [A Fundamental Approach to Emerging Markets Bonds]
Investors are likely funneling more money into the funds in search of yields. For instance, EMB has a 4.78% 30-day SEC yield, PCY has a 6.07% 30-day SEC yield and VWOB has a 4.59% 30-day SEC yield. In contrast, the yield on benchmark 10-year Treasuries is hovering around 2.38%.
Conservative pension funds and insurance companies have also taken notice of the attractive yield opportunity in the emerging markets and shifted into emerging debt as a way to bolster income to meet liabilities in a low yield environment.
“If you require, say, 5% a year in order to cover your insurance or pension liabilities, that is not available from developed market (debt) obviously,” Colm McDonagh, head of emerging market fixed income at Insight Investment, said in a Financial Times article.