Risk-tolerant investors searching for income and the potential for added upside with bonds have long turned to high-yield corporate debt and related ETFs. However, that focus has largely been limited to domestic offerings.
However, junk bond issuance isn’t confined by geography. There are attractive opportunities in this corner of the bond market outside of the U.S. That includes emerging markets high-yield corporate bonds, which are accessible via the VanEck Emerging Markets High Yield Bond ETF (HYEM ).
HYEM follows the ICE BofA Diversified High Yield US Emerging Markets Corporate Plus Index. Additionally, it turned 12 years old in May. It sports a tempting 30-day SEC yield of 7.31%. More importantly, the VanEck exchange traded fund returned 9.82% year-to-date as of Aug. 26. Home to 517 bonds, HYEM is geographically diverse, but the ETF’s Asia-Pacific exposure could be important going forward.
APAC Action Could Bode Well for High-Yield Bond ETFs Like HYEM
One of the primary concerns of any high-yield bond investor is default risk. On that note, there are encouraging signs regarding defaults rates on Asia-Pacific junk bonds. That could be a positive sign for HYEM as 2024 draws to a close.
“We expect Asia-Pacific high-yield nonfinancial companies’ trailing 12-month default rate to decrease in 2024 to 5.7% from 8.0% at the end of 2023, according to Moody’s Credit Transition Model (CTM). The forecast reflects our expectation of a less severe global slowdown, a likely decline in inflation and easing monetary policies,” noted Moody’s Investors Service.
Expectations that China’s economy could perk up in the months ahead may benefit HYEM. China is the ETF’s largest geographic exposure at 12.43%. Outside of emerging markets, interest rate cuts could provide support for developing world junk debt.
“We expect the Federal Reserve to begin reducing rates in the second half of 2024, with the extent and speed of these cuts hinging on the pace of inflation decline. Emerging market central banks will adjust their policies based on exchange rate implications and domestic economic goals, amid uncertainty regarding the Fed’s policy trajectory,” added Moody’s.
Important to the HYEM thesis is that liquidity conditions are improving across the Asia-Pacific region. This is highly relevant because many bond market collapses are born out of constrained liquidity.
“Liquidity conditions have improved, with Moody’s Asian Liquidity Stress Indicator dipping to 42.4% in June 2024 from 45.5% in December 2023, yet remaining above the long-term average of 28.5%,” concluded Moody’s. “This indicates corporate liquidity remains tight despite some easing. The easing liquidity conditions will improve companies’ funding access and mitigate refinancing risk, potentially reducing the corporate default rate.”
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