By Eric Fine
Portfolio Manager, Emerging Markets Fixed Income
As we explained in our April update, we believe that weaker growth is still not fully priced into the market. Since then, our stance has not changed. While higher policy rates were largely priced into the 2-year Treasury, which is at 5-year highs, the 30-year Treasury is not quite there yet. Consequently, the Fund is looking to increase its low-beta duration and further reduce its exposure to emerging markets foreign currency.
Emerging markets (EM) central banks have pre-empted Fed hikes. They are normally more hawkish, but in this latest episode they are also more pre-emptive. They entered the Russia/Ukraine crisis having already tightened monetary policy. However, growth risks abound, including China’s political incentives that may trump economic incentives, adding to slowdown risks.
Year-to-date, the Emerging Markets Bond Fund (the “Fund”) outperformed its benchmark due to the Fund’s very low duration and not holding Russian assets. For detailed Fund performance and EM debt outlook, download the commentary.
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Duration measures a bond’s sensitivity to interest rate changes that reflects the change in a bond’s price given a change in yield. This duration measure is appropriate for bonds with embedded options. Quantitative Easing by a central bank increases the money supply engaging in open market operations in an effort to promote increased lending and liquidity. Monetary Easing is an economic tool employed by a central bank to reduce interest rates and increase money supply in an effort to stimulate economic activity. Correlation is a statistical measure of how two variables move in relation to one other. Liquidity Illusion refers to the effect that an independent variable might have in the liquidity of a security as such variable fluctuates overtime. A Holdouts Issue in the fixed income asset class occurs when a bond issuing country or entity is in default or at the brink of default, and launches an exchange offer in an attempt to restructure its debt held by existing bond holding investors. Carry is the benefit or cost for owning an asset.
Investing involves risk, including loss of principal. You can lose money by investing in the Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. The Fund is subject to risks associated with its investments in below investment grade securities, credit, currency management strategies, debt securities, derivatives, emerging market securities, foreign currency transactions, foreign securities, hedging, other investment companies, Latin American issuers, management, market, non-diversification, operational, portfolio turnover, sectors and sovereign bond risks. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. As the Fund may invest in securities denominated in foreign currencies and some of the income received by the Fund will be in foreign currencies, changes in currency exchange rates may negatively impact the Fund’s return. Derivatives may involve certain costs and risks such as liquidity, interest rate, and the risk that a position could not be closed when most advantageous. The Fund may also be subject to risks associated with non-investment grade securities.
Investors should consider the Fund’s investment objective, risks, charges, and expenses of the investment company carefully before investing. Bond and bond Funds will decrease in value as interest rates rise. The prospectus and summary prospectus contain this and other information. Please read them carefully before investing. Please call 800.826.2333 or visit vaneck.com for performance information current to the most recent month end and for a free prospectus and summary prospectus.