The iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) is higher by almost 9% this year and some market observers believe catalysts are in place to continue driving emerging markets sovereign debt higher.
EMB, the largest emerging markets bond fund, is higher by nearly 9% this year. EMB tracks the J.P. Morgan EMBI Global Core Index, a market-cap-weighted index. Potential investors should note that since it is a cap-weighted index, countries with greater debt will have a larger position in the portfolio.
Although plenty of developing economies are paring interest rates this year, EMB still yields 5.46%, which is well above 10-year Treasuries and most other developed markets’ sovereign debt. Interestingly, emerging markets debt also benefited the US/China trade war.
“One beneficiary of a perceived easing in the U.S.-China trade conflict: EM debt, which has rallied recently and outperformed developed market peers,” said BlackRock in a recent note. “We see factors further supporting EM debt from here: a likely Federal Reserve rate cut this week and the potential for a stable U.S. dollar; an EM growth rebound; and a temporary U.S.-China trade truce. We favor selected EM debt for its income potential.”
A stabilizing dollar outlook also diminishes the danger of taking on emerging currency exposure, which has historically acted as a large source of volatility for investors investing in local-currency-denominated emerging market debt.
“So far this year, both hard currency EM bonds – those mainly denominated in U.S. dollars – and their counterparts denominated in local EM currencies (so-called local currency bonds) have delivered strong returns,” according to BlackRock. “Hard currency has outperformed mainly due to U.S. Treasuries’ strong performance.”
While a Fed rate cut helps, some emerging markets central banks are expected to lower rates, too. Brazil, Chile, Mexico, India, and Thailand are among the developing economies that have recently trimmed borrowing costs.
Speaking of the Fed, which lowered interest rates for a third time this year earlier this week, the Fed remains integral to EMB’s fortunes.
“The Fed’s dovish shift has helped local EM currencies recover versus the U.S. dollar, and this may persist in the near term,” notes BlackRock. “Its recent injections of liquidity into money markets have also helped weaken the dollar and hold down rates, in our view.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.