Emerging Markets Debt Could be Good ‘Rainy Day Exposure’

Investment grade emerging markets debt could be good “rainy day exposure” if the U.S. falls into a recession. At least, that’s what Vanguard’s co-head of emerging markets active fixed income Nick Eisinger is saying.

Per Bloomberg, Eisinger said if a recession occurs, the market is likely to “anticipate rate cuts by the Federal Reserve.” This “will mean that core rates rally, and by association some of the higher quality Treasury sensitive names also.”

Added Eisinger: “That’s kind of what we’d call our rainy day exposure.”

See more: “Corporate Bonds Can Be a Part of a Retirement Portfolio

Should the U.S. fall into recession, investment grade debt from countries like Poland or Saudi Arabia could be resilient. Bloomberg noted that since the Fed started raising rates in March 2022, investment grade emerging markets debt debt has returned 5.2% on a local currency basis.

Pushing Out the Timeline for Recession

At the start of the year, Vanguard estimated that the probability of a recession occurring over the next 18 months was more than 90%. It has now decreased that probability estimate to 70%, pushing its base-case recession timeline from 2023 to 2024.

“In essence, we’ve pushed out the timeline for a U.S. recession to 2024,” said Josh Hirt, a senior economist at Vanguard. He added that this is because “we’ve yet to feel the full effect of Fed interest rate tightening.”

The Vanguard Emerging Markets Government Bond Index Fund ETF Shares (VWOB) offers a exposure to emerging market government bonds. The fund employs an indexing investment approach. It aims to track the performance of the Bloomberg USD Emerging Markets Government RIC Capped Index.

VWOB had a 30-day SEC yield of 7.13% as of Aug. 31. It carries an expense ratio of 0.20%.

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