Emerging Bond ETF Risks to Monitor | ETF Trends

Investors who are using emerging market bond exchange traded funds to supplement their income needs should understand the potential risks of being exposed to this foreign debt asset.

On Wednesday, emerging market borrowing costs hit their highest level in five years as investors warned of a crippling credit crunch, the Financial Times reports.

The weakness is being fueled by depreciating local currencies, notably from commodity-producing countries, that have raised the borrowing cost of U.S. dollar-denominated debt.

“A credit crunch is a concern,” Franck Nicolas, head of investment at France’s Natixis Asset Management, told the Financial Times. “The worldwide demand for emerging market assets was huge and inflated a lot of assets. Now the situation is changing.”

Commodity-exporting country debt led the retreat while currencies like the Brazilian real, Mexican peso, South African rand and Russian ruble depreciated against the U.S. dollar. Consequently, the average government borrowing costs in dollars have hit 6.7%, or up from 5.3% last year.