Upside in EM Bonds Could Be Challenged by Inclement Weather

The emerging market (EM) bonds space could be looking more attractive as central banks may be loosening monetary policy, but inclement weather could potentially challenge that upside.

A combination of the COVID-19 pandemic, inflation, and rising interest rates over the past few years have kept investors from seeking opportunities in EM assets. As confidence slowly returns to the markets, EM debt could be a potential play, but now weather conditions add an additional wild card to the mix.

“Emerging-market bond bulls are betting the imminent end of central bank interest-rate hikes will help power up the asset class,” Bloomberg reported. “El Niño may have something to say about that.”

“The periodic weather pattern that is currently forming in the Pacific Ocean typically results in hotter, drier conditions and therefore higher food prices in affected nations, giving policymakers more reason to keep pushing up borrowing costs,” the report added.

This presents a push-pull for investor sentiment, but it doesn’t mean they should stay away from EM debt completely. An active management strategy could be of benefit.

Easy Ingress to EM Debt

Prospective investors looking to get EM debt exposure have a plethora of options, but exchange traded funds (ETFs) provide for easy ingress in a dynamic investment vehicle. Furthermore, active management can add even more pliability when navigating the intricate EM debt market.

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 relatively low 0.39% expense ratio.

For yield seekers, AEMB features a 30-day unsubsidized yield of about 7.16%, as of June 30. Its 12-month distribution rate is 5.70, which should appease monthly income seekers.

With regard to its holdings (almost 140), investors will see a mix of debt in corporate, sovereign, and quasi-sovereign. This gives AEMB a dose of diversification while simultaneously maximizing yield.

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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