Emerging markets junk-rated debt is catching a bid as highlighted by a one-month gain of almost 10% for the VanEck Vectors EM High Yield Bond ETF (NYSEArca: HYEM) as some investors see value in the previously lagging asset class.

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.

Interestingly, data indicate some investors are embracing the riskiest developing world high-yield debt.

“Developing-nation debt in the CCC and CC categories is handing investors 10 times the returns of investment-grade bonds, data for the past month show. A Bloomberg Barclays gauge of high-yield securities is outperforming its higher-rated counterpart by the most in 20 years and has erased the yield surge caused by the March rout,” reports Bloomberg.

HYEM is a more prudent play on emerging markets junk bonds as it allocates just 9% of its weight to CCC-rated debt.

Hopes for HYEM

Investors jumping back into the murky waters of emerging markets (EM) is a positive sign for the capital markets as it portends to the risk dial being turned a few notches higher. EM assets like bonds were viewed with distaste amid the height of the pandemic, but investors are slowly warming up to EM bonds again.

Value investors looking at EM hope this could provide further confirmation that space is finally seeing brighter days following the pandemic. What will be interesting to watch is whether developing economies can respond to the upside in a post-COVID world.

“Investors are getting adventurous as they bet on a revival in global economic activity and an accommodative stance by the Federal Reserve. The rebound from the selloff sparked by the coronavirus is now moving to a new phase, in which riskier nations and assets are coveted by yield-hunters,” according to Bloomberg.

Meanwhile, many emerging market central banks have more room to run with their easing policies, which may continue to support their local debt securities.

HYEM holds 679 bonds and has a 30-day SEC yield of 7.31%.

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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.