Emerging Markets Bond Investors Making a Comeback

Covid-19 turned fixed income investors away from emerging markets (EM) debt, but they could be coming back. As the pandemic wanes in EM countries, more investors could be willing to embrace the heightened risk when it comes to EM bonds.

“Individuals and institutions have put money into emerging-market bond funds for 10 weeks in a row starting in early July, the longest such stretch since late 2017, according to EPFR Global data,” a Wall Street Journal report noted. “The bulk of the money came in three weeks spanning late August and early September when net inflows hit about $8 billion.”

“Emerging-market bonds rated below investment-grade currently pay a yield of about 7.6%, down from about 11.5% in March but still 1 percentage point above their level before the pandemic, according to a widely followed JPMorgan Chase & Co. bond index,” the WSJ report added. “In contrast, yields of below investment-grade corporate bonds in the U.S. have already returned to pre-coronavirus levels of about 5.5%, according to Bloomberg Barclays index data. Yields fall as bond prices rise.”

“Emerging markets continue to look attractive and cheap versus developed markets,” said Yacov Arnopolin, an emerging-markets debt portfolio manager for Pacific Investment Management Co. “We are back to yield starvation, the same yield starvation we experienced before Covid.”

Investors looking to get EM debt exposure via ETFs can use the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB). EMB seeks to track the investment results of the J.P. Morgan EMBI® Global Core Index composed of U.S. dollar-denominated, emerging market bonds.

The fund generally will invest at least 90% of its assets in the component securities of the underlying index and may invest up to 10% of its assets in certain futures, options and swap contracts, cash and cash equivalents, as well as in securities not included in the underlying index. The index is a broad, diverse U.S. dollar-denominated emerging markets debt benchmark that tracks the total return of actively traded external debt instruments in emerging market countries.

EMB Chart

EMB data by YCharts

For investors seeking high-yielding income and emerging markets exposure, they can look to the VanEck Vectors EM High Yield Bond ETF (NYSEArca: HYEM). HYEM seeks to replicate the ICE BofAML Diversified High Yield US Emerging Markets Corporate Plus Index, which is comprised of U.S. dollar denominated bonds issued by non-sovereign emerging market issuers that have a below investment grade rating and that are issued in the major domestic and Eurobond markets.

HYEM is up 11.86% the past year according to Yahoo Finance performance figures.

Fund facts:

  • Focuses solely on the non-sovereign segment of the high yield emerging markets bond market
  • Currently lower average duration versus high yield U.S. corporate bonds
  • Lower historical default rates compared to high yield U.S. corporate bonds

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