Emerging markets bonds issuance is already reaching record highs early in 2024. The Financial Times reported that EM debt issuance is already at $50 billion, opening opportunities in EM bond ETFs.
The report noted that Saudi Arabia was the top issuer, followed by Mexico and Indonesia. The $51 billion issuance is $9 million higher compared to the same period the previous year.
The basis for the rush in debt issuance is the recent drop in borrowing costs. The expectation by capital markets is that central banks will follow suit when the Federal Reserve eventually loosens its monetary policy.
“Emerging market debt prices rallied strongly towards the end of 2023 as investors raised bets that the Federal Reserve will ease monetary policy faster than previously expected and successfully deliver a so-called soft landing for the economy this year,” the report said.
Because bond prices typically move inversely with yields, this will also make EM debt more attractive to fixed income investors. There’s no crystal ball when it comes to predicting how long the current bond rally will last. So issuers are getting deals done as quickly as possible.
“You have just had a significant decline in yields and no one is really quite sure if this year will be a hard, soft or no landing,” said David Hauner, head of global emerging markets fixed-income strategy at Bank of America. “Everything now is as good as it gets for an issuer.”
One ETF for Diversified Emerging Markets Bonds
Fixed income investors looking to get EM bond exposure have an array of options to choose from. An easier way is getting an all-inclusive ETF that draws from a variety of EM debt holdings, such as the Vanguard Emerging Markets Government Bond ETF (VWOB). With a low 0.20 expense ratio, the fund is deeply diversified. It has almost 700 bond holdings and an average duration of seven years as of November 30, 2023.
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. That provides easy access to EM government bonds.
The fund comes with a 30-day SEC yield of 6.75% as of January 9.
For more news, information, and strategy, visit the Fixed Income Channel.