Fixed-income exchange traded fund investors who are looking for some value in the bond market may want to take a look at emerging market debt.
BlackRock analysts argue that bond valuations already reflect low commodity prices and global central banks’ dovish stance makes riskier assets more attractive, The Malay Mail Online reports.
“It is premature to say that the weather has totally cleared” for emerging-market bonds, according to BlackRock. “But with many of the market ‘negatives’ accounted for, it is time to concentrate on some of the ‘positives,’ which we see gaining strength as market drivers going forward.”
Franklin Templeton’s chief investment officer for global macro Michael Hasenstab argues that the negative outlook on developing markets has gone too far, comparing the pessimistic sentiment now toward emerging markets to the time during the global financial crisis, which proved to be a buying opportunity.
“There is a deceleration, there is a moderation, there is not a collapse,” Hasenstab said. “But the markets are pricing in a collapse. So this to us is a fantastic opportunity when you have a huge disconnect between reality and market prices.”
Goldman Sachs’s emerging-market bond manager Yacov Arnopolin also sees the developing markets bottoming out this year
“We don’t anticipate a rapid rebound or V-shaped recovery,” Arnopolin said in a note. “Rather, we see EM turning the corner after three straight years of declining valuations and downward growth projections.”
According to Research Affiliates LLC, merging-market assets are so cheap that they may be “the trade of a decade,” reports Ye Xie for Bloomberg.
With borrowing costs at the highest levels since the global financial downturn, fixed-income investors are being well compensated for any further risks, like falling commodity prices or a China slowdown.
For instance, the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB) has a 6.88 year duration and a 5.58% 30-day SEC yield. The PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY) has a 7.83 year duration and a 4.68% 30-day SEC yield. The Vanguard Emerging Markets Government Bond ETF (NasdaqGM: VWOB) has a 6.2 year duration and a 5.13% 30-day SEC yield.
In contrast, a similar duration Treasury bond ETF, the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) has a duration of 7.53 years and a 1.52% 30-day SEC yield.
Additionally, local-currency emerging market bond ETFs have also produced some attractive yield opportunities. For example, the iShares Emerging Markets Local Currency Bond ETF (NYSEArca: LEMB) has a 4.75 year duration and a 4.23% 30-day SEC yield. The Market Vectors Emerging Markets Local Currency Bond ETF (NYSEArca: EMLC) has a 4.74 year duration and a 6.16% 30-day SEC yield. The actively managed WisdomTree Emerging Markets Local Debt Fund (NYSEArca: ELD) has a 4.92 year duration and a 6.04% 30-day SEC yield.
Max Chen contributed to this article.