Paolo Batori, global head of EM fixed income strategy at Morgan Stanley, projected a fundamental shift in market dynamic as about 5%, or $80 billion, invested by insurance companies and pension funds in European government bonds could switch over to emerging debt securities, or about double their current exposure.
The attractive emerging market bond yields, though, are not without their risks. For example, many fixed-income observers are closely watching the Federal Reserve’s monetary policy. A Fed rate hike could cause a large exit out of emerging market assets in favor of better returns in the U.S.
The emerging markets are also seen as a relatively risky area of the global market as well. Nevertheless, investors can still find high-quality emerging market bonds. For instance, EMB includes investment-grade debt rated AA 4.7%, A 10.9% and BBB 47.1%. PCY holds AA 4%, A 18% and BBB 35%. VWOB includes AA 11.0%, A 9.5% and BBB 50.8%. The higher quality tilt may help diminish some of the perceived risk with investing in the emerging markets.
For more information on the fixed-income market, visit our bond ETFs category.
Max Chen contributed to this article.