Emerging Markets Bonds Face an Uncertain Future

Even as economies are starting to open their doors once again, the Covid-19 pandemic will still have lasting effects, particularly when it comes to emerging markets (EM). This is especially the case when it comes to EM bonds, which face an uncertain future ahead and defaults could rise on existing debts.

“Emerging-markets bond funds are facing a reckoning as Covid-19 stresses economies across the globe, reminding investors that assets aimed at producing higher returns in good times can post outsize losses when things go wrong,” a Wall Street Journal article noted. “The Ashmore SICAV Emerging Markets Short Duration Fund has lost about 17% in the 12 months through the end of July, mostly because of bold bets on developing-market debt that paid well during steady periods of growth but that turned sour when economies fell into crisis.”

It’s not just emerging markets that could be feeling the pangs of the pandemic. Even developed markets aren’t safe from possible defaults as a result of Covid-19’s effects on their economies.

“Some analysts worry those defaults and the resulting negotiations with creditors could be the first among many, as the coronavirus puts a burden on developed and emerging economies alike,” the article added. “Governments have been forced to spend vast amounts of cash to keep businesses and people afloat, exacerbating troubles for those already bloated with debt or struggling with political unrest.”

^MSEM Chart

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EM Bond Exposure via ETFs

Fixed income investors who sense a value play in EM bonds can look to funds like the VanEck Vectors Emerging Markets Aggregate Bond ETF (EMAG). EMAG seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of MVIS® EM Aggregate Bond Index (the “EM Aggregate Bond Index”).

The fund normally invests at least 80% of its total assets in securities that comprise the fund’s benchmark index. The index is comprised of emerging market sovereign bonds and corporate bonds denominated in U.S. dollars, Euros or local emerging market currencies. The index includes both investment grade and below investment grade rated securities.

An option to consider in the EM high-yield bond market is 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.

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