A persistently strong U.S. dollar tempered the gains for emerging markets (EM) assets in 2024. But investors were still attracted to the riskier corners of the EM bond market.
Yahoo Finance mentioned that EM equities, as tracked by the MSCI Emerging Markets Index, did gain 5% for the year. That made it two consecutive years of gains. However, this paled in comparison to the global index of equities that notched a 17% again. The S&P 500 finished the year up over 20%.
As mentioned, bonds from EM countries with more tenuous economies were a highlight. This could be due to the yield these bonds can offer as fixed income investors brace themselves for interest rate cuts in the U.S.
“Dollar bonds from some of the world’s weakest economies have emerged as the bright spot in what’s otherwise been yet another lackluster year for emerging-market assets,” Yahoo Finance noted. The article also said, “Bloomberg’s gauge of EM high-yield dollar bonds was the top-performing asset in emerging markets with a 15% gain, seeing its best year since 2016.”
Also mentioned was that these riskier bonds outperformed their investment-grade counterparts. But that might not be sustainable over time. Inflation may continue to be sticky heading into 2025. So investors may not want to take on the additional credit risk associated with these bonds, some market experts suspect.
“Carlos de Sousa, an emerging-market debt portfolio manager at Vontobel Asset Management, is skeptical the high-yield rally can sustain this year’s [pace. He] said that country and credit selection will be key from here,” Yahoo Finance added.
2 Options for International Exposure
Rather than opt for the riskiest debt, a more diversified option would be the Vanguard Emerging Markets Government Bond ETF (VWOB). The fund tracks the performance of the Bloomberg USD Emerging Markets Government RIC Capped Index. It measures the investment return of U.S.-dollar-denominated bonds issued by governments and government-related issuers in EM countries. Just over half of VWOB’s portfolio is in bonds rated BBB or better, skewing toward investment-grade debt while still adding lower-rated bonds for added yield.
If the thought of EM bonds doesn’t particularly suit an investor’s portfolio, but exposure to international bonds is still an option, consider the Vanguard Total International Bond Index Fund ETF Shares (BNDX). The fund seeks to track the performance of the Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index. BNDX features a lower risk profile, so fixed income investors still get diversified exposure to international debt, but through developed countries.
For more news, information, and analysis, visit the Fixed Income Channel.