With recent talks of a Federal Reserve rate hike and bond yields ticking higher, some are concerned of another taper-tantrum event that could pressure developing market debt. Nevertheless, emerging market bond exchange traded funds may still find support as one of the few areas that investors can generate decent yields.
“The search for yield is not ending anytime soon,” William Sokol, Product Manager of ETFs at VanEck, told ETF trends in a call.
Sokol pointed out that despite the recent increase in bond yields, or decline in bond prices, the market is still stable and reflects normalized growth. Moreover, fundamentals in the emerging economies continue to strengthen with increased expected growth, stabilizing commodities market and narrowing deficits.
Consequently, investors may still find value and generate attractive yields through emerging market debt, even with the pending Federal Open Market Committee meeting and increased likelihood of a rate hike sometime this year.
“The ongoing search for yield continues to bring investors into emerging markets debt. Our view is that a rate hike by the Federal Reserve (the Fed) is not likely to dampen this trend, and that the environment for emerging markets debt will remain supportive,” Fran Rodilosso, a VanEck portfolio manager, said in a note.
Morgan Stanley also mirrors this sentiment.
“There is a clear limit to how far bond yields can rise based on perceived monetary policy shifts,” James Lord at Morgan Stanley said, according to the Financial Times. “The move higher in yields may not be sustainable, as nominal yields should be a reflection of real economic growth and inflation expectations.”
Lord also pointed to the macro resilience in the emerging markets and noted the more attractive valuations even after the recent rally.
Investors interested in emerging market bond exposure may consider U.S. dollar-denominated EM debt ETFs, such as the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB), PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY) and VanEck Vectors Emerging Markets Aggregate Bond ETF (NYSEArca: EMAG). EMB has a 4.49% 30-day SEC yield, PCY has a 4.82% 30-day SEC yield and EMAG has a 3.96% 30-day SEC yield.
Additionally, with the dollar weakening and emerging currencies rebounding, investors may also take a look at local currency-denominated ETFs, or emerging market bond ETFs that are issued in their local currencies, including the VanEck Vectors Emerging Markets Local Currency Bond ETF (NYSEArca: EMLC) and the WisdomTree Emerging Markets Local Debt Fund (NYSEArca: ELD). EMLC has a 5.47% 30-day SEC yield and ELD has a 5.37% 30-day SEC yield.
For more information on the fixed-income market, visit our bond ETFs category.