Come September, emerging markets will be watching the Federal Reserve closely with respect to monetary policy or even more specifically, what the central bank decides to do with interest rates. The U.S. dollar has been gaining strength, but its ramifications have been felt globally, particularly with respect to emerging-market assets.
A rising dollar could mean financial instability for emerging market nations trying to pay outstanding U.S. debt obligations with local currencies. Rising interest rates may also discourage foreign investment into emerging market nations in favor of assets based in the U.S.
“The big question for global investors is whether the Fed not only acknowledges the recent market volatility, but also the fact that its own policy signals may be partly behind the deterioration in global risk sentiment,” wrote ING FX strategist Viraj Patel. “Under a Yellen Fed, we were pretty sure that these market conditions would have kept the US central bank in wait-and-see mode; however, all eyes will be on new Fed Chair Powell to see whether he formally adopts an ‘America First’ monetary policy approach.”
Related: Fed Meets Inflation Target: What’s Next?
Corporate Bond ETFs Tick up Higher
Meanwhile, corporate bond ETFs like the iShares Intermediate Credit Bond ETF (NASDAQ: CIU) and Vanguard Interm-Term Corp Bd ETF (NASDAQ: VCIT) ticked up higher. CIU was up 0.17% and VCIT was up 0.02%.
CIU tracks the investment results of the Bloomberg Barclays U.S. Intermediate Credit Bond Index. CIU focuses on investment-grade corporate debt and sovereign, supranational, local authority and non-U.S. agency bonds that are U.S. dollar-denominated and have a remaining maturity of greater than one year and less than or equal to ten years.
VCIT seeks to track the performance of a market-weighted corporate bond index with an intermediate-term dollar-weighted average maturity, namely the Bloomberg Barclays U.S. 5-10 Year Corporate Bond Index. While VCIT holds debt issues with maturities between 5 and 10 years, they are all investment-grade holdings to minimize default risk.
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