Emerging-market junk bonds are selling off at a record pace as investors seek out more attractive yield-generating opportunities. Fixed-income ETF investors can also target these developing economies through high yield-related strategies.
Developing country companies have sold a record $118 billion in high-yield dollar bonds this year, or more than doubled from five years earlier, and the pace does not seem to be letting up any time soon, the Wall Street Journal reports.
Given the low yields on U.S. Treasury bonds and other ultra-safe instruments, fixed-income investors are looking for higher-yielding alternatives, such as those issued by emerging market corporates.
For example, average, Asian high-yield credit in dollars produced a yield of about 7.6% or over 2 percentage points above their equivalent U.S. high-yield debt counterpart, according to ICE BofAML indexes. The Asian bonds even tended to have shorter maturities and higher credit ratings on average.
Chen Yi, head of global capital markets at Haitong International Securities Co., argued that Asian borrowers could keep up the robust pace of bond sales next year as more international investors turn to emerging-market assets.
“The global liquidity is still there, and given the difficulties in Latin American economies, one of the few places where that money can go is Asia,” Chen told the WSJ. “So we’re bullish on dollar high-yield debt in Asia. Plus, demand for Chinese property is still hot.”
Central bank policies continue to support the outlook as well. The Federal Reserve has signaled its comfort with leaving rates as is through next year, so investors are looking for higher-yielding assets in this lower-for-longer yield environment.
Jean-Charles Sambor, deputy head of emerging-market fixed income at BNP Paribas Asset Management, also believed that debt from emerging market issuers was “still very cheap.”
Bond investors can access emerging markets junk bonds with exchange traded funds such as the VanEck Market Vectors EM High Yield Bond ETF (NYSEArca: HYEM) and iShares Emerging Markets High Yield Bond ETF (CBOE: EMHY).
The iShares Emerging Markets High Yield Bond ETF, which tracks the Morningstar Emerging Markets High Yield Bond Index, holds nearly 520 emerging markets junk bonds. The fund has an effective duration of 5.58 years and a 30-day SEC yield of 5.84%.
The VanEck Vectors Emerging Markets High Yield Bond ETF holds 625 emerging markets junk bonds with an effective duration of 3.38 years and a 30-day SEC yield of 5.75%.
For more information on the fixed-income market, visit our bond ETFs category.