Emerging markets bonds and the corresponding exchange traded funds, including the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB) and PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY), are solid performers this year, but with the Federal Reserve seemingly on course to raise interest rates in June, some investors may be concerned about how this asset class will react.
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. Moreover, the rebound in energy prices could have reassured investor fears of a potential defaults in the energy space.
However, emerging markets bond ETFs, including EMB and PCY, the two largest in the space, offer compelling yields of their. Additionally, these funds look more attractive thanks to the recent struggles encountered by the U.S. dollar.
EMB and 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.
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.[related_stories]