Bond issuance hit records in 2024. History could repeat itself this year, especially regarding emerging market (EM) bonds. The only obstacle will be whether the macroeconomic environment could affect demand.
“BofA Global Research predicts EEMEA will account for an impressive 65% of this year’s total emerging market sovereign debt, following last year’s $116 billion in issuances,” reported Finimize. “Barclays is more cautious with a $75 billion estimate for 2025, showcasing differing outlooks. These issuances are driven by the expectation of economic upheaval under a potential second Trump administration and recent fiscal strategies.”
As mentioned, President Trump could reignite a trade war if proposed tariffs ensue. In turn, this could tamp down demand for EM assets such as bonds, especially if it results in persistent inflation.
As noted, one of the headwinds bonds are facing is the uncertainty surrounding the Federal Reserve’s interest rate policy. While as mentioned, the Fed’s plans are to ease monetary policy, inflation is proving to be more stubborn than anticipated, which could give them pause on rate cuts.
“Something that I’ve been saying for a while, inflation is much more sticky than we have been saying,” UBS CEO Sergio Ermotti told CNBC. “The [truth] of the matter is that we need to see also how tariffs will play a role in inflation. Tariffs will probably not really help inflation to come down. And therefore I don’t see rates coming down as fast as people believe.”
An Entry Point for EM Bond Exposure?
In a worst-case scenario, the Fed could raise interest rates in response to inflation. That wouldn’t bode well for EM assets given a stronger dollar. However, it could prove to be an ideal entry point for investors looking to get exposure to EM bonds. Furthermore, one of the attractive features of EM bonds are the higher yields they offer relative to other debt issues.
If that’s the case, one fund to consider would be the Vanguard Emerging Markets Government Bond ETF (VWOB ). The fund 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 EM countries. Just over half of VWOB’s portfolio is in bonds rated BBB or better, skewing toward investment-grade debt while still adding lower-rated bonds for added yield.
For more news, information, and analysis, visit the Fixed Income Channel.
