Investors Are Soaking Up Emerging Markets Bonds in Early 2023

Even for the safest debt, last year’s bond market was a forgettable one, but opportunities are arising now that investor confidence is brimming to start the year. That’s feeding into investor interest for riskier debt once again, including emerging markets (EM).

A strong dollar for much of 2022, higher interest rates, and rising global inflation presented a triple whammy for emerging market investors. In addition, some countries were still dealing with the economic effects of the COVID-19 pandemic — China, for example, saw a resurgence in COVID cases, causing them to re-institute lockdown measures that hampered economic growth.

Now, as the smoke dissipates from 2022’s confluence of headwinds for EM assets, investors are giving them a second look, including bonds. EM countries have been issuing bonds to start the new year, and the demand is there to soak up the supply.

“Emerging market nations placed $39 billion in bonds during the first two weeks of this year, nearly half the total for all of 2022. Investors lapped them up,” a Barron’s article noted.

At some point, the EM bond markets were going to see a turnaround with the rest of the broader bond market, and thus far, that appears to be the case. It’s a rally that’s been brewing since the latter months of 2022 as the expectation of fewer interest rate hikes started to grow.

“Emerging markets have magnified a global bond rally that started three months ago, as investors start to see light at the end of the tunnel of inflation and rate hikes to quell it,” the article added further.

Convenient, Cost-Effective EM Bond Exposure

There are a plethora of ways investors can get into the EM bond action, but the vast opportunities available can be overwhelming. In addition, knowing the right mix of debt to get diversified exposure only adds to the complications.

As opposed to settling for individual debt issues by various countries, there’s an easier way: the Vanguard Emerging Markets Government Bond Index Fund ETF Shares (VWOB). It does all this with a low 0.20% expense ratio.

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 analysis, visit the Fixed Income Channel.