Evening Brief – 02.22.24
EM Corporate Debt in Your Portfolio
Most of the global bond market has been under pressure this year. Yet, one segment of the market has bucked the trend. Below-investment-grade emerging market corporate debt has shown impressive strength, according to exchange-traded funds.
The 2.1% gain in the VanEck Emerging Markets High Yield Bond ETF (HYEM) in 2024. The gain builds on a robust 8.2% increase in 2023, making it one of the few sources of consistent earnings in the fixed income arena over the past year.
Meanwhile, the WisdomTree Emerging Markets Corp Bond ETF (EMCB), which focuses on investment-grade credits and governments issued in emerging nations, has seen a marginal rise of 0.6%. The divergence in performance reflects investors’ appetite for riskier assets despite an uncertain market environment.
The rest of the fixed income space remains in negative territory. Adverse outcomes dominate, replicating the decline in U.S. bonds this year. Inflation-indexed government bonds outside the U.S., as tracked by SPDR FTSE International Government Inflation-Protected Bond ETF (WIP), is down 5% this year.
The relative scarcity of emerging market corporate bonds contributes to their appeal, according to Bloomberg. “Prices are jumping due to a dearth of EM corporate bonds in secondary trading. There’s been fewer issuances than expected, unlike sales of sovereign bonds that saw the most active January in three years. Companies are under little pressure to raise dollar debt as refinancing needs have moderated and other fundraising avenues, such as local-currency debt, open up.”
Another point to consider is the relatively attractive yields. According to Morningstar.com, HYEM has a trailing 12-month yield of 6.2%. That is more than twice the value of an investment-grade bond in the U.S. as represented by the widely popular Vanguard Total Bond Market ETF (BND). This favorable yield differential has clearly attracted investors.