• Emerging Markets Bonds

    Emerging Markets Bonds Strength Tested by U.S. Election

    Fran Rodilosso, Head of Fixed Income ETF Portfolio Management, CFA

    At this writing, the surprise election of Trump on November 8, 2016 has markets anticipating higher U.S. rates and inflation, which has dramatically impacted fixed income asset classes, including emerging markets bonds. In addition, emerging markets are greatly impacted by the shifting winds of global trade, and given the yet-to-be-determined trade policies of a Trump Presidency, we expect markets to remain somewhat unsettled in the coming months.

    Looking back at the month of October, global fixed income markets suffered a setback, as U.S. interest rates remained on the volatile path they had assumed in September. By the end of the month, rates had moved 0.23% higher with the 10-year U.S. Treasury note yields ending October at 1.83%. Emerging markets bonds sold off as well, mostly in line with U.S. Treasuries. Other fundamental drivers of performance were mixed. As the U.S. presidential election loomed large, risk appetite remained relatively healthy in October. Meanwhile, economic data and Fed signaling led to increased anticipation of a December rate hike.

    Emerging Markets Continue to Grow Faster than Developed Markets

    The news for emerging markets this year has been taken mainly as positive. For starters, the growth differential of emerging markets versus developed markets has expanded in 2016 YTD, while the global growth picture overall has improved slightly. China moved out of the headlines during the first quarter, but the China yuan renminbi (CNY) has been devaluing and capital has been leaving the country. On the other hand, positive Purchasing Managers’ Index (PMI) readings have been in line with the slightly improved global growth backdrop. While Turkey and South Africa battle their own political crises, Latin American economies have begun to show long awaited fiscal improvements, and several key central banks are anticipating, or have recently begun, a cycle of interest rate cuts.

    Hard Currency Sovereign Bonds Selloff on Higher Rates

    Emerging markets hard currency sovereign bonds were largely impacted by a rising interest rate driven selloff, with added negative contribution from Venezuela on solvency concerns and Colombia after the peace agreement referendum failed. A proposed bond swap by Venezuela’s national oil company, Petroleos de Venezuela S.A. (PDVSA), turned into a market saga as the proposed terms were revised multiple times due to lack of market interest. With rising uncertainty about the consequences of a failed swap ahead of sizeable obligations coming due, Venezuela’s (and PDVSA’s) bond prices dropped significantly. Colombia’s progress on a fiscal agenda had taken a back seat to the signing of a peace agreement. In a surprise vote reminiscent of the Brexit vote in June, the agreement was shot down via public referendum. Colombian assets sold off sharply as a result. Positive contributions were mainly from smaller, high beta issuers like Ecuador and Ukraine. Overall, U.S. dollar sovereign bonds returned -1.24% in October, though on average credit spreads moved only 0.04% wider. New supply of dollar bonds has been running at a record pace in 2016, at approximately $132 billion through October 31.

    In October, another notable occurrence in the sovereign debt space was the impact of ratings moves on widely followed indices. Turkey moved to the high yield sector within JP Morgan’s sovereign indices; Hungary at the same time moved back to investment grade. The portion of investment grade issuers in most widely followed U.S. dollar sovereign index, the J.P. Morgan EMBI Global Diversified Index (EMBIGD), is down to approximately 52.5% at the beginning of November, with Turkey (3.95% of the EMBIGD) trading places with Hungary (3.11% of the EMBIGD). In the J.P. Morgan Custom EM Investment Grade Plus BB-Rated Sovereign USD Bond Index (JPEGIGBB) Turkey moved into the capped (at 20%) BB category, while Hungary re-ascended to the investment grade category. As a result, Turkey’s weight fell from 6.2% to 4.3%, while Hungary grew from 3.5% to 4.8%. The corporate debt market, which has a higher weighting towards higher rated Asian issuers, began November at approximately 60.5% investment grade.

    Local Rates, Currencies Drag Down Local Currency Sovereign Bonds

    Emerging markets local currency sovereign bonds were down 0.85% in October, driven by both local rate movements and adverse currency movements. Colombia and Central/Eastern European markets were the worst performers during the month. Brazil, South Africa, and Mexico (with the peso closely tracking election odds) were the top positive performers, and Peru and Chile had positive returns. Interest rate easing cycles continued in the majority of emerging markets local markets, including Brazil after the country’s central bank lowered the SELIC rate in October for the first time in four years (from 14.25% to 14.00%).

    High Yield Emerging Markets Corporate Bonds Show Strength in October

    Corporates performed better than dollar and local sovereigns, but investment grade credit in particular dragged lower with U.S. Treasuries. High yield emerging markets credit, posted slightly positive returns in October, almost canceling out the 0.51% loss by investment grade corporates. Credit spreads tightened by approximately 0.12% overall. One risk barometer we have been monitoring, the yield spread between emerging markets high yield corporate and U.S. high yield corporates, tightened further during October to 27 basis points (“bps”) from 51 bps at the end of September. On an option-adjusted-spread basis, which also takes into account the shorter duration of emerging markets high yield, the spread narrowed to 51 bps from 80 bps a month earlier.

    October 2016 1-Month Total Returns by Country

    October 2016 1-Month Total Returns by Country Chart

    Source: FactSet as of 10/31/2016. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.


  • Important Disclosure

    For informational and advertising purposes only.

    This information originates from VanEck (Europe) GmbH which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin). The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice. VanEck (Europe) GmbH and its associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. All indices mentioned are measures of common market sectors and performance. It is not possible to invest directly in an index.

    All performance information is historical and is no guarantee of future results. Investing is subject to risk, including the possible loss of principal. You must read the Prospectus and KIID before investing.

    No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.

    © VanEck (Europe) GmbH