Strong Growth and Higher Yield Make Emerging Markets Debt Attractive

Confidence in emerging markets (EM) debt is returning as more fixed income investors are seeking higher yield options as the U.S. Federal Reserve decelerates its pace of rate hikes heading into the second half of 2023.

It’s a change of pace from a bearish 2022 where investors sought safer debt in developed markets. High inflation and rate hikes soured the taste for EM debt, but an investor palate for more yield and higher growth potential is changing that.

“Fixed income credit investors thought they were safer in developed markets last year as market uncertainty rose,” Institutional Investor said. “But now emerging markets are gaining ground offering investors higher credit yields and stronger growth potential.”

According to a PineBridge Investments report, yields in EM debt have reached their highest level in the past 10 years. High yield bonds in Asia are six percentage points higher than those in the U.S., and EM corporate bonds are yielding 2.8% higher than their U.S. counterparts.

“Much has changed since a year ago, when we favored shifting fixed income credit risk toward the U.S. due to its relative economic strength and the dollar’s dominance,” Steven Oh, global head of credit and fixed income at PineBridge, said in the report. The report also noted that EM are rebounding from 2022 faster than developed markets, as evidenced by stronger corporate balance sheets. “Now in the second half of 2023, it’s essentially the reverse, with a continued shift toward a more global portfolio approach, including a renewed focus on emerging markets.”

Get Exposure to Upside in Emerging Markets Debt

As EM debt continues to see more upside, consider the American Century Emerging Markets Bond ETF (AEMB). The fund uses active management to deliver high levels of income and attractive risk-adjusted returns over a full market cycle with a low 0.39% expense ratio.

As of May 31, AEMB features a 30-day unsubsidized yield of about 7.19%. Its 12-month distribution rate, again as of May 31, is 5.71%.

In terms of holdings (over 120 of them), investors will see a mix of debt in corporate, sovereign, and quasi-sovereign. This gives AEMB a dose of diversification while maximizing yield at the same time.

Salient characteristics of AEMB on its product website:

  • Dynamically invests in a broad range of emerging markets debt securities, without limitations on credit quality.
  • Emphasizes hard currency (USD) sovereigns and quasi-sovereigns, as well as emerging markets corporate debt.

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