Tariffs, inflation, geopolitical tensions, and other factors continue to feed into market uncertainty for even safe haven assets like Treasuries. As such, investors could be giving riskier emerging market (EM) bonds a second look.
The signs of EM bond interest were already evident last month as mentioned in a CNBC report. Between April 2 and 25, when market volatility was heavy from tariff news, EM bond yields started to slide while the benchmark 10-year Treasury yield rose. Typically, U.S. bonds are seen as the ideal safe haven, but given the market uncertainty surrounding tariffs, investor mindsets appear to have shifted. Given the latest market activity, investors are looking outside the U.S. for opportunities, with EM bonds being one of those options.
“We are seeing that pickup into emerging market fixed income assets,” said Brandywine Global Investment Management’s portfolio manager Carol Lye.
While EM bonds do carry a higher degree of credit risks, some asset managers are seeing improving fundamentals in certain EM countries. BNP Paribas Asset Management, for instance, mentioned EM economies should outpace their developed peers in GDP growth in 2025 though macroeconomic risks do exist.
“Many emerging markets have a healthy balance of payments and sovereign issuers have generally become more prudent in debt issuance and fiscal policies,” BNP Paribas said. “Ratings agency Fitch accorded EM sovereigns moderate net positive ratings in 2024 as economies improved through progressive reforms.”
Of course, one of the reasons investors seek EM bonds is because of their yield.
“The real yields are still very high. So that premium pays us to be there [emerging markets], and the currencies are also benefiting from that shift out of the dollar story,” Lye said.
Capture EM Exposure in 1 Fund
Rather than sift through bond issues of various EM countries, an easier way to capture exposure is through one fund: the Vanguard Emerging Markets Government Bond ETF (VWOB ) . This ETF tracks the performance of the Bloomberg USD Emerging Markets Government RIC Capped Index. It measures the investment return of U.S.-dollar-denominated bonds issued by governments and government-related issuers in emerging market countries. Over half of VWOB’s portfolio is rated BBB or better. The portfolio skews toward investment-grade debt while adding bonds below investment-grade to extract additional yield.
Identifying which countries’ bonds are exhibiting strength will require an investor or advisor to perform their own due diligence. With VWOB, the fund provides broad-based exposure, adding to the diversification it provides as opposed to overconcentrating on the bonds of one or even a few countries.
For more news, information, and analysis, visit the Fixed Income Channel.
