Give Emerging Markets Debt a Look While U.S. Treasury Yields Are Low

Monday’s trading session saw Treasury yields continue their downward trajectory, which has fixed income investors looking for alternate solutions when it comes to seeking yield. One option is emerging markets (EM) debt via exchange-traded funds (ETFs) like the iShares J.P. Morgan USD Emerging Markets Bond ETF (NasdaqGS: EMB).

“The 10-year Treasury yield dropped to another record low on Monday as the historic decline in U.S. rates continued amid the coronavirus outbreak and Wall Street calls for Federal Reserve stimulus,” a CNBC report noted. “The 10-year yield hit a record low of 1.030% at one point overnight before bouncing and was last at 1.08%.  The 2-year Treasury yield fell to 0.71%, threatening to break its low in November 2016. The 30-year yield was at 1.623%, a record low.’

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 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.

Before diving in, however, investors should exercise caution, particularly in this current market where the coronavirus remains a wild card.

“EM is always a risk-on asset,” said Eric Baurmeister, a senior portfolio manager for emerging markets debt at Morgan Stanley Investment Management. “As this gets worse, EM will suffer.”

However, should the markets return to some degree of normalcy, emerging markets will present a solid buy-the-dip opportunity.

“The selloff is shockingly minor,” said Aaron Hurd, a senior currency portfolio manager at State Street Global Advisors. “We normally look to periods of higher volatility to yield a nice list of opportunities.”

If the thought of emerging markets proves to be too much of a risky endeavor, investors who are hesitant to look abroad can look for higher-yielding assets like The High Yield ETF (NYSEArca: HYLD). HYLD seeks high current income with a secondary goal of capital appreciation by selecting a focused portfolio of high-yield debt securities, which include senior and subordinated corporate debt obligations, such as loans, bonds, debentures, notes, and commercial paper.

Another option is the VanEck Vectors Fallen Angel High Yield Bond ETF (BATS: ANGL). ANGL seeks to replicate as closely as possible the price and yield performance of the ICE BofAML US Fallen Angel High Yield Index, which is comprised of below investment grade corporate bonds denominated in U.S. dollars that were rated investment grade at the time of issuance.

ANGL essentially focuses on debt that has fallen out of investment-grade favor and is now repurposed for high yield returns with the downgraded-to-junk status.

For more market trends, visit ETF Trends.