2024 was a lackluster year for emerging market bonds. But they were still able to draw some interest from investors. Moving forward, improving fundamentals for EM bonds can add more intrigue for prospective investors.
In particular, a rosier outlook could be attributed to the macroeconomic environment. Nonetheless, there are still headwinds for EM bonds. So due diligence is necessary for investors and advisors looking at this corner of the bond market.
“In 2025, moderating inflation, improving economic growth and easing monetary policy create a potentially favorable macro environment for emerging market bonds,” Reuters said. “Still, tariffs, trade barriers, the strength of the dollar and geopolitics still remain live concerns for this year.”
Investors still interested in adding EM bonds can take a look at 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. 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.
Another International Option
As previously mentioned, while fundamentals are strong, there are geopolitical risks affecting EM. Two headwinds are the threat of tariffs under President Trump and the ongoing strength of the dollar given the persistent inflation.
“China is the main target of tariffs, but the devil is often in the details,” saud Fabrizio Santin, senior investment manager at Pictet AM.
“We think the bulk of dollar strength is now behind us,” said Paul McNamara, investment director emerging market debt at GAM Investments. “Larger US deficits ahead seem extremely likely (and as a result strong US growth [outperformance). But] this will only translate to a stronger dollar if monetary policy is tight.”
If EM bonds poses too much risk and uncertainty for investors looking for international bond exposure, Vanguard has another option. Rather than EM economies, fixed income investors can get exposure to the bonds of developed countries. One route is via the Vanguard Total International Bond Index Fund ETF Shares (BNDX ).
BNDX seeks to track the performance of the Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index. As mentioned, the fund features a lower risk profile with its exposure to developed countries. But it still offers the diversification benefits that international bonds offer.
For more news, information, and analysis, visit the Fixed Income Channel.
