If bond markets can forecast gains for equities, then the news should be good for emerging markets stocks and exchange traded funds (ETFs) because the PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY) is on fire.
As a dollar-denominated emerging markets debt fund, PCY and rival such as the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB) and the Vanguard Emerging Markets Government Bond ETF (NasdaqGM: VWOB) are benefiting from the Federal Reserve’s dithering on interest rates and the weaker U.S. dollar.
Related: Giving a Nod to Emerging Markets Bond ETFs
Previous Fed rate hikes have triggered volatility in the emerging markets. While many emerging markets have garnered a bad reputation for experiencing spiraling debt defaults in face of rapid currency depreciation, the developing economies are more resilient in a weak commodities environment.
According to BlackRock, emerging market governments have accumulated less dollar debt, built up foreign reserves and adopted flexible exchange rates to obviate mistakes during the 1980s and 1990s crises. Though the current outlook for emerging markets debt is far from sanguine, some analysts see opportunity in the asset class.
Related: Investors Turn to Emerging Market Bond ETFs for Higher Yields
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.
However, it should be noted that most of the bonds held by EMB and PCY, the two largest emerging markets bond ETFs, are rated well into investment-grade territory.
[related_stories]Emerging market bond investors should analyze concentration risk or look under the hood of their funds to better understand how much of a particular investment they are exposed to.
When it comes to U.S. bond ETFs, investors may be attracted to the cheap valuations and wider yield premiums that these bonds offer over safe-haven government bonds after benchmark yields on 10-year Treasuries dipped back toward all-time lows.
Related: State Street Debuts ETFs to Navigate Bond Market Uncertainty
Moreover, the rebound in energy prices could have reassured investor fears of a potential defaults in the energy space.
“Invesco favors buying in dollar-denominated bonds for the best combination of risk and returns, according to Tom Boccellari, a fixed-income and alternatives product strategist at the fund house. The Bloomberg USD Emerging Market Composite Bond Index has advanced 8.7 percent from a low on Jan. 20,” according to Bloomberg.
For more information on the Bonds ETF market, visit our Bonds category.
PowerShares Emerging Markets Sovereign Debt Portfolio
