In the face of a rising dollar amid high interest rates, emerging markets (EM) bonds have been drawing interest from the bond market. The anticipation of lower interest rates to come after the U.S. Federal Reserve loosens monetary policy is fueling interest in this riskier corner of the debt market.
“Since early 2023, the bonds of these developing nations, both sovereigns and corporates, have outpaced the Bloomberg Global Aggregate and the U.S. Agg. The prospect of a somewhat weaker dollar, once the Federal Reserve finally cuts interest rates, would further fuel EM bonds,” a Chief Investment Officer report noted, referencing a report Ned Davis Research.
“The fact that EM has been able to outperform in the face of a firm U.S. dollar is a testament to its underlying strength," the report added further.
In addition to future price appreciation following rate cuts, VWOB also offers a competitive yield alternative. As of June 6, VWOB’s 30-day SEC yield is 6.78%. That should appeal to yield seekers who want to take advantage of the elevated yields before the U.S. central bank eventually cuts interest rates. Furthermore, this fund comes with a low expense ratio of 0.20%.
Overall, the ETF 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.
Get European Debt Exposure
BNDX is a compelling option for fixed income investors looking for European debt exposure. Almost 60% of the fund is comprised of European bonds, which are also drawing interest as of late.
“There’s coming a point where European bonds are more attractive than Treasury bonds,” said Bill Gross, co-founder and former chief investment officer of Pacific Investment Management. “In terms of attraction, the German 10-year bunds and French 10-year, their spreads have narrowed significantly in the past month or two relative to Treasuries.”
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 3.32% also as of June 6. Furthermore, it carries a low expense ratio of 0.07%.
For more news, information, and analysis, visit the Fixed Income Channel.
