EM Debt Demand Shown in Interest in Latin America

The anticipation of more rate hikes by central banks amid stubborn inflation could be fueling an amplified shift to emerging markets (EM) debt. Latin American bonds, for example, are already seeing interest, per a Financial Times article.

Institutional money is flowing into EM debt as the greenback continues to weaken, as evidenced by the U.S. Dollar Index (DXY) falling 5% halfway into 2023. As such, the demand for EM assets could be rising again as asset managers are allocating to EM debt like Latin American bonds.

“Big asset managers are flocking to Latin American bonds and currencies, attracted by the region’s high interest rates, low inflation and more resilient economies than many had expected,” the FT article said.

The article mentioned that one of the reasons for the interest in Latin American bonds is the strong performance of the currencies in the region. When it comes to EM assets, performance typically follows how well the currency is doing, and right now, Latin American currency is experiencing upside.

“Latin America is home to five of the world’s top eight performing currencies this year, which have benefited from the region’s central banks acting early and decisively by raising rates and keeping them high even as inflation recedes,” the article added. “Total returns of local bonds have also surged ahead of their developed market peers, as chunky inflation-adjusted yields draw the attention of investors.”

Latin America Debt Exposure

Bonds from Latin American company Petroleos Mexicanos and Argentine Republic Government International Bonds are part of the top 10 holdings of the Vanguard Emerging Markets Government Bond Index Fund ETF Shares (VWOB). In addition, VWOB provides a broad-based option for EM bond exposure with its over 700 bond holdings, as of May 31.

Per its fund description, 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. It is designed to track the performance of the Bloomberg Barclays USD Emerging Markets Government RIC Capped Index.

Additionally, the fund comes with a low 0.20% expense ratio. For yield seekers, the fund surely doesn’t disappoint with its 30-day SEC yield of almost 7% (as of July 6).

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