Storm Winds Change
May 23, 2022
Read Time 1 MIN
We believe recession risks are rising, with a European recession, oil embargo risks and China’s Zero-Covid uncertainties adding to U.S. Federal Reserve (Fed) rate hikes as headwinds. Fed actions may result in stability in long-end U.S. treasuries. Risks to growth, however, may not be fully priced into the market, complicating matters, and causing us to consider increasing low-beta spread duration and decreasing some emerging markets foreign currency.
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.
The Emerging Markets Bond Fund (the “Fund”) outperformed its benchmark for the month of April due primarily to the Fund not holding Russian securities, and secondly to the Fund’s very low duration. For detailed Fund performance and EM debt outlook, download the commentary.
This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Information provided by third-party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this communication and are subject to change without notice. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
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.
May 16, 2022
June 23, 2022
We believe the market has not yet priced in weaker growth projections. As such, we continue to increase low-beta spread duration and reduce exposure to EMFX.
May 18, 2022
Emerging markets central banks were ahead of developed markets in hiking rates, and we believe EM local currency bonds may offer yield and diversification potential as U.S. rates rise.
May 16, 2022
Coming out of the Spring 2022 IMF meetings, we are looking to increase low-beta spread duration and decrease some EMFX exposure.
April 25, 2022
The world counts down to a recession as the Fed pushes rates higher, challenging all duration and low-risk bonds. Emerging markets debt continues to find opportunity in this environment.