Bond Investors Willing to Roll the Dice Can Look at EM Bonds

Investors are already looking to rebound plays, especially after inflation fears have racked much of the world’s stocks, especially in emerging markets (EM). The bond markets have been responding in a similar fashion, but for those willing to roll the dice, EM bonds could be the place to look.

It’s a dice roll indeed — emerging markets have suffered for much of this year given rising global inflation coupled with a stronger dollar. EM performance is typically tied to the performance of the local currency against the greenback, but the U.S. dollar has been ahead amid rising interest rates thanks to central bank tightening.

However, as the old adage notes, with risk comes reward. Those willing to take on depressed EM bonds can obtain higher yields, which could hedge against rising inflation.

“My take is that in these circumstances is investors may do better to consider EM debt instruments with the goal of matching or outperforming U.S high- yield (HY) bonds,” wrote Nick Sargen for Forbes. “Currently, both B-rated and BB-rated EM sovereign bonds offer good relative value versus comparably-rated US HY instruments for 5-year maturities, while single A-rated instruments are expensive.”

“Also, because the EM yield curve for sovereigns is currently steep by historic standards, the incremental yield is greater if investors are willing to extend out to 10-year maturities or beyond,” Sargen added.

An EM Bond Option From Vanguard

With a 30-day SEC yield of 6.17% (as of May 24), fixed income investors can reap the rewards of higher yield without a high cost. In the case of the Vanguard Emerging Markets Government Bond Index Fund ETF Shares (VWOB), it comes with a low expense ratio of 0.20%.

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 USD Emerging Markets Government RIC Capped Index.

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