As the prospect of rate cuts becomes more plausible, the buzz surrounding EM becomes more audible. That interest is also permeating into the bond markets for emerging market debt.
If you flip a coin nine times and it shows heads, the anticipation is that heads will more than likely come up on the 10th. That’s what it feels like for market pundits betting on rate cuts. Since December 2024, rates have remained steady, but at some point, tails will come up.
The CME FedWatch suggests rates will more than likely stay the same in July. That certainly falls in line with a Fed that’s keen on keeping rates steady before it gets economic data that suggests otherwise.
However, when you starting looking further out into 2025, bets on a rate cut are starting to pile in. September, for example, shows more faith in Fed cuts, with just over 50% anticipating Fed easing.
If cuts occur, it’s a perfect storm for emerging market bonds. Interest is already manifesting itself in bond sales.
EM Debt Interest Surges
This overall projection in the markets is that two rate cuts could still be in store for 2025. That could give investors enough reason to start looking at EM bonds through a magnified lens. Rate cuts typically favor EM bonds, as a weakened dollar is favorable to the local currencies of EM countries. The divergence in performance of the MSCI Emerging Markets Index and the U.S. Dollar Index is readily apparent in their YTD charts.
Interest in EM debt is already showing itself in bond sales. During the first half of 2025, EM bond sales were booming. This was even the case during the tariff announcements in April. One would think that should derail the idea of investors pouring more money into EM bonds. But that simply wasn’t the case. For example, JPMorgan revealed EM debt sales in Central and Eastern Europe, Middle East and Africa surpassed $190 billion so far this year, and is on track to beat the all-time record of $285 billion.
“What is astonishing this year is how markets … were still active, if not very active, in the toughest moments of the globe,” said Alexis Taffin de Tilques, global head of emerging markets sovereigns and head of Central and Eastern Europe, Middle East and Africa debt capital markets with BNP Paribas.
Ideal EM Bond Exposure
In the world of ETFs, the interest is palpable. Anticipation of Fed rate cuts is already opening the floodgates for investment in EM funds. Given this, an ideal option for EM bond exposure is the Vanguard Emerging Markets Government Bond ETF (VWOB ).
Getting EM bond exposure can be tricky. Thus, rather than navigate these waters of complexity, VWOB offers a singular option in the convenience of an ETF wrapper. Investors get quality EM bond exposure with a low expense ratio of 0.15%.
The case for EM bonds typically ties to the yield they offer. In the case of VWOB, it certainly doesn’t disappoint in this department. As of June 2, the fund has a 30-day SEC yield of 5.66%.
Per its baseline fund description, it tracks the performance of the Bloomberg USD Emerging Markets Government RIC Capped Index. VWOB tracks the returns of U.S.-dollar-denominated bonds issued by governments and government-related issuers in EM countries. The fund has a YTD return of just under 7% (as of July 3), highlighting the price appreciation performance of EM bonds in this fund.
With a combination of yield and price appreciation, VWOB is hard to beat.
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