Emerging Markets Traders Are Finding Opportunities in Bonds

The anticipation of a bond market comeback is sparking more traders to make bold moves in riskier corners of the credit spectrum, including emerging market (EM) debt. To tail their moves, fixed income investors can also look to exchange-traded funds (ETFs) focusing on EM bonds.

The start of 2024 has been marked by record issuance for public and private debt. For the latter, traders are also looking specifically at corporate debt in the EM space, according to a Bloomberg report.

“The first five weeks of 2024 have produced an early winner for emerging-market traders: corporate bonds denominated in US dollars,” the report noted.

When it comes to getting corporate debt exposure, fixed income investors can obtain more yield if they’re willing to take on the additional credit risk. To help de-risk in corporate debt, they may want to opt for a more value-oriented, investment-grade slant. But for additional yield, EM corporate debt is where traders are finding opportunities.

“That type of debt is yielding higher returns than most other asset classes within the EM universe, translating into annualized gains of 12% in US currency terms, according to data compiled by Bloomberg,” the report added. “The bonds are outperforming US corporate notes, narrowing the yield spread to the lowest since June 2.”

Reach for More Yield With Emerging Market Bonds

With a 30-day SEC yield of 6.78% as of February 1, fixed income investors who want to get EM debt exposure can look to the Vanguard Emerging Markets Government Bond ETF (VWOB). With a low 0.20 expense ratio, the fund is deeply diversified, with just over 700 bond holdings and an average duration of just over seven years. The average effective maturity is about 12 years, allowing investors to obtain that extra yield by reaching further out on the yield curve.

Per its baseline fund description, VWOB 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.

Speaking once again to the fund’s deep diversification, VWOB invests in a broad spectrum of country-specific debt. This includes bonds from Saudi Arabia, Mexico, Turkey, Indonesia, and the United Arab Emirates, which round out the top five country allocations.

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