There could be a heavy dose of volatility for emerging markets (EM) bonds in the second half of the year as issuance slows down in addition to political risks. Still, getting yield in the current market environment remains a selling point for EM bonds.
The year began with record issuance from both the public and private sectors. However, market physics could be taking hold of the EM bond market. What essentially goes up must come down and major banks are forecasting a slowdown.
“After a blockbuster six months, the sale of emerging-market bonds in hard currencies is set to slow down sharply in a second-half that’s littered with political risk,” reported Bloomberg.
“The amount of debt sold by government and corporate borrowers in developing markets has reached $321 billion in the busiest first-half since 2021, according to data compiled by Bloomberg,” the report added. “Still, forecasts from JPMorgan Chase & Co. and Bank of America Corp. show issuance is poised to slow more than usual after borrowers rushed to meet their funding needs at the beginning of the year.”
That said, the window of opportunity remains for investors to add EM bonds. This could not only diversify their portfolios, but to take advantage of yields now before central banks institute rate cuts. Investors can opt for the Vanguard Emerging Markets Government Bond ETF (VWOB ).
As noted, one of the prime features of EM bonds is their attractive yield and VWOB has that in spades. As of July 1, the 30-day SEC yield for VWOB is 6.78%.
Overall, the fund seeks to track 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.
An Alternative International Option for EM Bonds
Fixed income investors who may want EM, but not full exposure can opt for the + Vanguard Total International Bond Index Fund ETF Shares+ (BNDX ). It’s an ideal ingress to international bonds without the credit risks associated with developing countries if investors are willing to sacrifice yield.
However, as mentioned, BNDX still adds EM bond exposure, but limits that to about 7% in its portfolio composition. Bond markets in Europe and the Pacific dominate the rest of the fund. That mitigates credit risk.
Per its fund description, BNDX 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. Furthermore, the fund’s 30-day SEC yield is 3.25% also as of July 1. Furthermore, it carries a low expense ratio of 0.07%.
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