Surprising Source of Refuge Amid Banking Crises | ETF Trends

It’s not a sequel to the global financial crisis, but 2023 has brought a surprising number of bank collapses, including Silicon Valley Bank (SVB) and Signature Bank of New York, among others. Times like these often prompt investors to revisit safe-haven asset classes.

Hence, gold is performing well this year. Other ideas to consider might surprise some market participants, including emerging markets bonds. Emerging markets anything don’t strike investors as refuge-type assets amid broader market turmoil, yet debt issued by developing economies are holding up admirably this year.

Perhaps surprisingly, that includes local currency bonds. Just look at the VanEck J.P. Morgan EM Local Currency Bond ETF (EMLC), which is higher by 3.38% year-to-date, as of April 6. That’s mostly in-line with the widely followed Bloomberg U.S. Aggregate Bond Index, but EMLC sports a yield 300 basis points in excess of domestic bond benchmark. Of note to novice investors is the fact that EMLC isn’t as sensitive to U.S. interest rate gyrations as some market participants expect.

“Emerging markets local currency bonds are not directly impacted by U.S. interest rates, so the rapid rate hikes over the past year and volatility in U.S. bond yields have not had the same impact as on U.S. fixed income asset classes. Also, most EM central banks sharply raised policy rates shortly after the pandemic-driven turmoil in 2020, resulting in high real interest rates that have tamed inflation and provide room to ease policy if needed,” noted VanEck.

Due to emerging markets central banks moving swiftly to ward off inflation — the Fed was comparatively late to that party — many of the countries represented in EMLC could be primed to lower borrowing costs this year. At the very least, the bulk of the exchange traded fund’s geographic lineup is unlikely to raise rates in 2023. There are other compelling reasons to give EMLC a look.

“The turmoil in developed markets has also resulted in a recent increase in the yield pickup over emerging markets local currency bonds versus U.S. rates, following a steady decline this year as U.S. rates rose. With conditions tightening in the U.S. due to the distress in the financial sector, this rate differential may persist or increase, providing further support for the asset class,” added VanEck.

The $3.3 billion EMLC holds 368 bonds with an effective duration of 4.81 years, putting the fund in intermediate-term territory. Roughly 65% of the ETF’s components are rated A or BBB.

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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.