China's Fresh Round of Stimulus Could Prop Up EM Bonds

In the space of emerging markets (EM), China plays a pivotal role in the broad performance of EM assets as a whole. As the second-largest economy continues to work out its struggles, a fresh round of stimulus could help prop up EM assets, including bonds.

As the dollar gained strength amid the Federal Reserve’s rate hiking, it also soured the taste for EM assets in return. However, investors could be dipping back into EM assets once again as the anticipation of lower interest rates should hopefully translate into a weakening dollar and thus, EM strength.

“Developing world stocks are heading toward their biggest two-day gain this year, while currencies are advancing for a fifth day, rising 0.3%,” a Yahoo Finance article said. “Almost all Latin American currencies are strengthening, with the Mexican peso and Brazil’s real leading advances.”

Likewise, the spillover effect from China could continue to play a part in emerging markets asset strength moving forward. The second-largest economy is essentially the tide that lifts all boats in EM countries. So any positive news coming out of China should help.

“There’s nothing in the short-term that does more to benefit emerging markets than better news out of China,” said Charles Robertson, head of macro-strategy at FIM Partners Ltd. “The RRR rate doesn’t resolve the geopolitical angst, heal the property sector or promise strong growth, but it is a signal that the authorities are prepared to do something to reverse the equity market decline. That’s good enough for markets this morning.”

Just a few weeks in, 2024 is already shaping up to be a record year for bonds in terms of issuance. The same can be said for EM bonds, with Brazil recently making headlines with a $4.5 billion record bond offering.

An Opportune Time for EM Bonds

As investor confidence returns to EM, fixed income investors may want to look at EM bonds or more specifically, the Vanguard Emerging Markets Government Bond ETF (VWOB). With a low 0.20 expense ratio, the fund is deeply diversified, with almost 700 bond holdings and an average duration of just under seven years.

The fund seeks to track the performance of the Bloomberg USD Emerging Markets Government RIC Capped Index. The index specifically measures the investment return of U.S.-dollar-denominated bonds issued by governments and government-related issuers in EM countries. For yield seekers, the fund comes with a 30-day SEC yield of 6.77% as of January 22.

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