Battered Emerging Markets Bonds Create Value Opportunity for Investors

Global inflation hasn’t been kind to emerging markets (EM) assets in general, which includes bonds. While picking a bottom in the bond market (or any market for that matter) is difficult, now could be an opportune time.

A combination of a rising dollar and global inflation has been decimating EM assets for most of 2022. As such, investors have been quick to yank their capital from EM-focused funds, including those focusing on bonds.

“It has been a tough year for emerging markets bonds. Investors pulled a record $70bn from funds investing in EM debt between January and the end of September — a period that included only seven weeks of net inflows,” reported the Financial Times.

“Those relentless outflows signal how badly markets have been battered in 2022, with the soaring US dollar and rising global interest rates sucking money out of EM assets,” the report added. “The question now is whether inflation and interest rates are near their peak, creating an opportunity for bond prices to rise again.”

This is where fixed income investors can get EM bond exposure at value-oriented prices. As opposed to diving into a vast universe of EM bonds to choose from, there are easier options that are also more cost-efficient.

Getting Diversified EM Exposure

One convenient way to get EM bond exposure with a focus on safer government bonds, exchange traded funds (ETFs) can offer that level of exposure. One fund to consider is the Vanguard Emerging Markets Government Bond Index Fund ETF Shares (VWOB).

VWOB seeks to track the performance of a benchmark index that measures the investment return of U.S. dollar-denominated bonds issued by governments and government-related issuers in emerging market countries. The fund employs an indexing investment approach designed to track the performance of the Bloomberg Barclays USD Emerging Markets Government RIC Capped Index.

Getting exposure to EM debt comes at a 0.20% expense ratio for VWOB. For that, the fund comes with a 30-day SEC yield of almost 8% as of October 20.

The average duration for the fund’s holdings is around seven years, giving the fund intermediate-level exposure to help capture yield while also limiting duration risk. In terms of country allocations, the top three are comprised of Mexico, Saudi Arabia, and Indonesia.

To mitigate rate risk, the fund focuses mainly on short- and intermediate-term debt, especially in the current market. 30% is allocated to debt maturing in one to five years, while another 30% is allocated to debt maturing in five to 10 years.

For more news, information, and strategy, visit the Fixed Income Channel.