Emerging markets bonds and the corresponding exchange traded funds (ETFs) remain among one of this year’s most impressive asset classes and the group received another endorsement last week.
Looking ahead, economists anticipate central banks from Turkey to Russia will cut borrowing costs as exchange rates stabilize, especially with the U.S. dollar weakening, which helped alleviate inflationary pressures.
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Investors may be attracted to the cheaper valuations and wider yield premiums that emerging market bonds offer over safe-haven government debt, especially with yields on benchmark 10-year Treasuries dipping back toward historical lows this year.
Moreover, emerging market assets as a whole remain depressed to developed markets. Consequently, the unloved area may have already priced in most of the negatives that have previously pressured the market.
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Fixed-income investors can diversify into emerging market through a number of ETF options. For instance, the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB) and PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY) provide exposure to U.S. dollar-denominated emerging debt securities, or developing country bonds issued in U.S. dollars. The USD denomination can help support these funds in case of a sudden appreciation in the greenback.[related_stories]
“EM sovereign credit delivered 0.6% returns this week. High yield gained 0.8%, while investment grade credit was up 0.4%. EM corporate debt saw a similar pattern, up 0.4% overall, with high yield up 0.6%, ahead of investment grade’s 0.3% return,” reports Teresa Rivas for Barron’s.