With a new U.S. presidential administration coming in 2025, the uncertainty of the impact on emerging markets (EM) assets appears to be causing investors to head for the exits on EM equities. Bonds, on the other hand, appear to remain resilient.
EM bonds have been a prime choice for fixed income investors seeking yield as long as they’re willing to assume the additional credit risk. However, improving fundamentals have also been attracting investors into EM bonds as of late with the U.S. easing monetary policy and thus, the greenback pulling back. However, the U.S. Dollar Index (DXY) is up 2% the past month and up almost 5% year to date, potentially causing EM investors to think twice.
“Foreign investors sold out of emerging market stocks in October by the most since the COVID-19 market sell-off in early 2020, but inflows to EM bonds and debt more than offset the outflow,” reported.
As indicated, EM bonds haven’t met the same outflow fate as equities. As the Federal Reserve looks primed to continue cutting rates, bond investors could be seeking other avenues for yield, which includes EM bonds.
“Stock portfolios saw a $25.5 billion outflow, the largest since March 2020, while bonds attracted $27.4 billion,” added Reuters.
Investors looking to add EM bonds whether it’s for yield or improving credit quality, consider the Vanguard Emerging Markets Government Bond ETF (VWOB ). The fund tracks the performance of the Bloomberg USD Emerging Markets Government RIC Capped Index. The index specifically measures the investment return of U.S.-dollar-denominated bonds issued by governments and government-related issuers in EM countries.
Complement U.S. Bond Exposure
Fixed income investors who already have a portfolio comprising U.S. bonds can also add international bonds for portfolio diversification. With different countries in various economic cycle, international bonds can open pathways to opportunities, whether it’s for yield, price appreciation, or both.
Rather than single out individual bonds to build a diversified portfolio, an easier option is to consider the Vanguard Total International Bond Index Fund ETF Shares (BNDX ). The fund seeks to track the performance of the Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index. Its portfolio is primarily investment-grade debt, so credit risk is minimized. BNDX features a lower risk profile, so fixed income investors won’t get the yield of VWOB but will get diversified exposure to international debt via developed countries, mainly in Europe.
For more news, information, and analysis, visit the Fixed Income Channel.
