Fixed income investors have heard plenty in recent months about the impact higher U.S. interest rates will have on corporate bonds and the corresponding exchange traded funds. There has also been plenty of news regarding the effects of higher U.S. borrowing on emerging markets sovereign debt funds.
However, after some significant declines earlier this year, the time could be right for investors to consider emerging markets corporate bond ETFs, such as the iShares Emerging Markets Corporate Bond ETF (NYSEArca: CEMB).
In the years after the 2008 financial crisis, emerging market corporations issued trillions of dollars of foreign-currency bonds, taking advantage of the low interest rates in developed countries, the Wall Street Journal reports.
Now, emerging market currencies are experiencing a steep depreciation and a plunge in commodity prices have fueled redemptions from emerging markets, adding to fears that emerging companies may not be able to repay their USD-denominated obligations, especially as the Federal Reserve looks to hike interest rates ahead.
“High-yield corporates underperformed significantly, down 3.2% in the past month, clearly affected by the weakness in U.S. high yield. Equivalent high-yield sovereigns were down only 0.9%. By region, Latin America was the main driver. By sector, it was again mining and metals that underperformed, with total returns down 6.4% in the past month. … Russian corporate spreads were also affected this time around, although largely driven by the sovereign spreads widening,” according to a Morgan Stanley note posted by Dimitra DeFotis of Barron’s.