The Often Overlooked and Misunderstood Bond Buy
Read Time 4 MIN
Many U.S. investors, in general, tend to shrug off global markets, particularly when it comes to bonds. After nearly a decade and a half of declining yields and low volatility for developed markets, the past few years have been characterized by rising rates and emerging risks in global bond markets. As such, we believe investors may hold a number of misconceptions and need to take another look at an often overlooked asset class, emerging markets bonds, as we believe they may add resilience to an overall bond portfolio.
Below we explore three reasons investors should consider allocating to emerging market bonds in the current market environment. View here for a PDF version of this blog.
1. Emerging markets have Stronger Fundamentals Than Developed Markets
The age-old debate between Emerging Markets and Developed Markets has taken an intriguing twist. Contrary to the historical norm, EMD showcases stronger fundamentals than the developed markets. While developed markets grapple with a higher debt-to-GDP ratio of 124.3%, emerging markets have a moderate 69.9% debt-to-GDP ratio. Emerging market fundamentals look compelling relative to developed markets across a range of additional metrics, including fiscal deficits and current account deficits. Emerging market debt (EMD) also boasts higher yields ranging from 5.74% to 8.26%* and significantly outpacing developed markets. This shift underscores a pivotal narrative: In a world wary of escalating debt in developed markets, EMD is emerging as a beacon of fiscal responsibility.
Key Points:
- While developed markets grapple with a higher debt-to-GDP ratio of 124.3%, emerging markets have a moderate 69.9% debt-to-GDP ratio
- EMD also has higher yields, ranging from 5.74% to 8.26% and significantly outpacing developed markets, even the U.S.
- In a world wary of escalating developed market debts, EMD is emerging as a beacon of fiscal responsibility.
The Market Has Rewarded Responsible Policies
Source: VanEck as of 03/31/2022 - 09/30/2024. The performance data quoted represents past performance. Past performance is not a guarantee of future results. EM represents 50% J.P. Morgan GBI-EM Global Diversifi ed Index/50% J.P. Morgan EMBI Global Diversifi ed Index. DM is represented by the ICE BofA Global Broad Market Index. U.S Broad Market is represented by the ICE BofA US Broad Market Index.
2. Emerging Markets Have Lower Debt
Notwithstanding China’s more recent policy direction, emerging markets, in general, have moved much more quickly to increase interest rates compared to the U.S. and other developed markets in order to stay ahead of inflation. For investors, this fundamental backdrop means less issuance and rolling over of debt, a favorable supply/demand dynamic that should help support EM bonds. In addition, if needed, EM central banks can hike interest rates without bankrupting the government (unlike the challenges we saw in the United Kingdom or even the U.S. during its budget showdowns).
Debt Levels of EM Countries Are Relatively Attractive
General Government Gross Debt, % GDP
Source: VanEck Research; Bloomberg LP. Data as of September 2024.
Past performance is not indicative of future results. Please see important disclosures and definitions at the end of the blog.
3. EM Has Independent Central Banks
The primary focus of EM central banks is to focus on controlling inflation, and they do this by maintaining high real interest rates. For investors, the result has been not only higher nominal yields but higher real yields. The benefits to EM local currency investors are a more substantial level of income that is not eroded by the loss of purchasing power (through a potentially weaker currency). Additionally, if the central bank's actions are successful in controlling inflation, it can lead to a stronger and more stable economy.
EM Central Banks’ Focus on Inflation Means Higher Income for Investors
Real Policy Rates in 12 Months if Inflation and Rates Expectations Materialize (%)
Source: VanEck Research; Bloomberg LP. Data as of September, 2024.
Real Policy Rates (adjusted by trailing CPI) in EM and DM, (%)
Source: VanEck Research; Bloomberg LP. Data as of August 2024.
Past performance is not indicative of future results. Please see important disclosures and definitions at the end of the blog.
The VanEck Emerging Markets Bond Fund was one of the first blended emerging markets bond strategies in the market. The Fund is actively managed with the flexibility to invest in sovereign and corporate debt in hard and local-currency. The Fund’s broad universe and bottom-up, high active share approach drives the opportunity to potentially outperform the benchmark over a market cycle.
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IMPORTANT DISCLOSURES
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. 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. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.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.
The Fund’s benchmark index (50% GBI-EM/50% EMBI) is a blended index consisting of 50% J.P. Morgan Government Bond Index-Emerging Markets (GBI-EM) Global Diversified and 50% J.P. Morgan Emerging Markets Bond Index (EMBI). The J.P. Morgan GBI-EM Global Diversified tracks local currency bonds issued by Emerging Markets governments. The J.P. Morgan EMBI Global Diversified tracks returns for actively traded external debt instruments in emerging markets, and is also J.P. Morgan’s most liquid U.S dollar emerging markets debt benchmark.
ICE BofA US Broad Market Index tracks the performance of US dollar denominated investment grade debt publicly issued in the US domestic market, including US Treasury, quasi-government, corporate, securitized and collateralized securities.
ICE BofA Global Broad Market Index tracks the performance of investment grade debt publicly issued in the major domestic and eurobond markets, including sovereign, quasi-government, corporate, securitized and collateralized securities.
Emerging Market securities are subject to greater risks than U.S. domestic investments. These additional risks may include exchange rate fluctuations and exchange controls; less publicly available information; more volatile or less liquid securities markets; and the possibility of arbitrary action by foreign governments, or political, economic, or social instability.
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 which may include, but are not limited to, risks associated with active management, credit, credit-linked notes, currency management strategies, derivatives, emerging market issuers, energy sector, ESG investing strategy, foreign currency, foreign securities, hedging, high portfolio turnover, high yield securities, interest rate, LIBOR replacement, market, non-diversified, operational, restricted securities, investing in other funds, sovereign bond, and special risk considerations of investing in Latin American issuers, all of which may adversely affect the Fund. Emerging market issuers and foreign securities may be subject to securities markets, political and economic, investment and repatriation restrictions, different rules and regulations, less publicly available financial information, foreign currency and exchange rates, operational and settlement, and corporate and securities laws risks. 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.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
Related Funds
IMPORTANT DISCLOSURES
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. 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. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.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.
The Fund’s benchmark index (50% GBI-EM/50% EMBI) is a blended index consisting of 50% J.P. Morgan Government Bond Index-Emerging Markets (GBI-EM) Global Diversified and 50% J.P. Morgan Emerging Markets Bond Index (EMBI). The J.P. Morgan GBI-EM Global Diversified tracks local currency bonds issued by Emerging Markets governments. The J.P. Morgan EMBI Global Diversified tracks returns for actively traded external debt instruments in emerging markets, and is also J.P. Morgan’s most liquid U.S dollar emerging markets debt benchmark.
ICE BofA US Broad Market Index tracks the performance of US dollar denominated investment grade debt publicly issued in the US domestic market, including US Treasury, quasi-government, corporate, securitized and collateralized securities.
ICE BofA Global Broad Market Index tracks the performance of investment grade debt publicly issued in the major domestic and eurobond markets, including sovereign, quasi-government, corporate, securitized and collateralized securities.
Emerging Market securities are subject to greater risks than U.S. domestic investments. These additional risks may include exchange rate fluctuations and exchange controls; less publicly available information; more volatile or less liquid securities markets; and the possibility of arbitrary action by foreign governments, or political, economic, or social instability.
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 which may include, but are not limited to, risks associated with active management, credit, credit-linked notes, currency management strategies, derivatives, emerging market issuers, energy sector, ESG investing strategy, foreign currency, foreign securities, hedging, high portfolio turnover, high yield securities, interest rate, LIBOR replacement, market, non-diversified, operational, restricted securities, investing in other funds, sovereign bond, and special risk considerations of investing in Latin American issuers, all of which may adversely affect the Fund. Emerging market issuers and foreign securities may be subject to securities markets, political and economic, investment and repatriation restrictions, different rules and regulations, less publicly available financial information, foreign currency and exchange rates, operational and settlement, and corporate and securities laws risks. 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.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.