When It Comes to Bonds, Emerging Markets Have the Edge

On July 26, the Federal Reserve boosted interest rates by 25 basis points to the highest levels in 22 years while indicating that at least one more rate hike could be on the table this year. The 11th rate increase since March 2022 could imply that the central bank remains concerned about inflation.

Conversely, economists are reducing recession expectations, indicating that safe U.S. government debt could be less appealing than other corners of the bond market. Advisors and investors searching for higher levels of income with better upside potential may want to consider dollar-denominated emerging markets debt.

Advisors looking to broaden their knowledge base of emerging markets bond can attend VanEck’s upcoming webinar “Why EM Bonds Over DM Bonds.” The webcast is scheduled for July 31 at 10:00 AM Eastern time and will be hosted by VanEck chief economist Natalia Gurushina and Eric Fine, emerging markets fixed income portfolio manager.

The VanEck duo will examine issues, including why developing world fixed income assets are currently preferable to developed market equivalents, how weakness in China’s economy is impacting global bond allocations and how the second half outlook for the global economy could impact emerging markets debt.

ETFs Make Emerging Markets Bonds More Accessible

Advisors searching for broader approaches to dollar-denominated emerging markets bonds can access the asset class via mutual funds and exchange traded funds with the VanEck Emerging Markets High Yield Bond ETF (HYEM) standing as one of the more venerable options for tapping junk bonds issued by emerging markets corporations.

The $404.43 million HYEM debuted in May 2012 and follows the ICE BofA Diversified High Yield US Emerging Markets Corporate Plus Index. HYEM currently sports a 30-day SEC yield of 8.65%, or 71 basis points in excess of the widely observed Markit iBoxx USD Liquid High Yield Index. Year-to-date, HYEM has been 110 basis points less volatile than the domestic junk bond gauge.

Additionally, emerging markets junk debt offer the potential for superior capital appreciation relative to their domestic rivals. For the 12 months ending July 26, HYEM returned 12.4% while the Markit iBoxx USD Liquid High Yield Index gained just 3.9%. HYEM’s annualized volatility over that span was 140 basis points below that of the domestic index.

With an effective duration of 3.33 years, HYEM holds 567 bonds. Chinese and Brazilian debt represent about 22% of the portfolio.

Advisors that would like to attend the VanEck webinar can register for the event here.

For more news, information, and analysis, visit the Beyond Basic Beta Channel.