EM Bonds Are In Good Shape for 2024
December 08, 2023
Read Time 5 MIN
Compared to U.S. core fixed income asset classes, emerging markets (EM) fixed income has had a relatively strong 2023. High carry has driven returns, and less exposure to U.S. duration risk has continued to be a positive contributor. Looking to 2024, slowing growth, the Fed’s policy direction and geopolitical risk are sources of uncertainty. However, with yields providing substantial cushion amid the possibility that the Fed can orchestrate a soft landing, we expect conditions to remain supportive for various segments within EM debt.
Emerging Markets Fixed Income Has Had a Relatively Strong 2023
Yield & Duration as of 11/30/2023
Source: J.P. Morgan and ICE Data Indices as of 11/30/2023. EM HY Corporates is represented by ICE BofA Diversified High Yield US Emerging Markets Corporate Plus Index; EM USD Sovereigns is represented by the J.P. Morgan EMBI Global Diversified Index; US HY Corporates is represented by the ICE BofA US High Yield Index; EM Local Currency Sovereign is represented by the J.P. Morgan GBI-EM Global Core Index; US IG Corporates is represented by the ICE BofA US Corporate Index; US Broad Market is represented by the ICE BofA US Broad Market Index; US Treasuries is represented by the ICE BofA US Treasury Index.
Local Currency Sovereigns:
The U.S. macro and rate environment, and how that impacts Fed policy, may have a significant impact on emerging markets local currency sovereign bonds in 2024. If the market consensus for a soft landing materializes we expect a fairly benign environment for the asset class. Continued declines in U.S. inflation may lead to rate cuts by the Fed at some point next year, and could keep longer term U.S. yields from rising significantly (although we do not expect significant declines from current levels). This may benefit EM currencies (EMFX) as dollar weakness continues, but EMFX has rarely been the key driver of positive returns in EM local debt. For instance, EMFX has rallied over the past two months as U.S. bond yields have declined, but has contributed only approximately +1.3% to a total return of approximately +8.4% this year. We believe a similar dynamic could play out next year, with EMFX supported but carry being the primary driver of total return. Although there is certainly a case for a more bearish view on the U.S. dollar, EMFX strength may be tempered by rate cuts by many EM central banks. If the Fed cuts rates sooner or deeper than expected, we would expect that to be accompanied by a sell-off in risk assets, which may not favor EMFX.
Another rationale for an EM allocation is that sovereign fundamentals remain in good shape. EM inflation has continued to moderate and will likely hit target levels in many countries next year. EM central banks have remained vigilant, providing support for currencies and generating attractive real interest rates. Although the rate differential versus U.S. rates has declined below historical averages, we believe the fundamental story in EM versus DM make such comparisons less relevant.
High Yield Corporates:
Within EM corporates, high yield bonds may be an attractive alternative or complement to U.S. high yield in 2024 in a soft landing scenario. With yields currently over 10%, we believe they offer attractive income potential given the higher quality of universe compared to U.S. high yield in terms of credit quality exposure. The asset class also enters 2024 with less exposure to the troubled Chinese property sector compared to prior years, with 1.3% exposure as of 11/30/2023 versus nearly 7% at the beginning of 2022. Similar to most credit asset classes, spreads are currently tighter than their historical average, although to a much lesser degree than U.S. high yield. With resilient fundamentals and net issuance that is expected to remain muted next year, we see continued support for spreads which may help balance against macro uncertainty. Notably, although most U.S. investment grade bond indexes include emerging markets borrowers, U.S. high yield bond indexes and associated products do not and so EM high yield bond allocations can add significant diversifications at the borrower level.
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DISCLOSURES
ICE BofA Diversified High Yield US Emerging Markets Corporate Plus Index: is comprised of U.S. dollar-denominated bonds issued by non-sovereign emerging markets issuers that are rated below investment grade and that are issued in the major domestic and Eurobond markets.
ICE BofA US Broad Market Index: tracks the performance of US dollar denominated investment grade debt publicly issued in the US domestic market, including US Treasury, quasi-government, corporate, securitized and collateralized securities.
ICE BofA US Corporate Index: tracks the performance of US dollar denominated investment grade rated corporate debt publicly issued in the US domestic market.
ICE BofA US High Yield Index: tracks the performance of U.S. dollar-denominated below investment grade corporate debt publicly issued in the U.S. domestic market. Qualifying securities must have a below investment grade rating. Original issue zero coupon bonds, 144a securities, both with and without registration rights, and pay-in-kind securities, including toggle notes, qualify for inclusion.
ICE BofA US Treasury Index: tracks the performance of US dollar denominated sovereign debt publicly issued by the US government in its domestic market.
J.P. Morgan EMBI Global Diversified Index: tracks USD-denominated emerging markets sovereign bonds. The weighting scheme provides additional diversification by more evenly distributing weights among the countries in the index.
J.P. Morgan GBI-EM Global Core Index: tracks bonds issued by emerging markets governments and denominated in the local currency of the issuer. The weighting scheme provides additional diversification by more evenly distributing weights among the countries in the index. Countries are capped at 10% and floored between 1% to 3%.
Please note that VanEck may offer investments products that invest in the asset class(es) or industries included in this commentary.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. 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. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
An investor cannot invest directly in an index. Returns reflect past performance and do not guarantee future results. Results reflect the reinvestment of dividends and capital gains, if any. Certain indices may take into account withholding taxes. Index returns do not represent Fund returns. The Index does not charge management fees or brokerage expenses.
All indices are unmanaged and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. Certain indices may take into account withholding taxes. An index’s performance is not illustrative of the Fund’s performance. Indices are not securities in which investments can be made. The Fund’s benchmark index (50% GBI-EM/50% EMBI) is a blended index consisting of 50% J.P. Morgan Government Bond Index-Emerging Markets (GBI-EM) Global Diversified and 50% J.P. Morgan Emerging Markets Bond Index (EMBI). The J.P. Morgan GBI-EM Global Diversified tracks local currency bonds issued by Emerging Markets governments. The J.P. Morgan EMBI Global Diversified tracks returns for actively traded external debt instruments in emerging markets, and is also J.P. Morgan’s most liquid U.S dollar emerging markets debt benchmark.
Information has been obtained from sources believed to be reliable but J.P. Morgan does not warrant its completeness or accuracy. The Index is used with permission. The index may not be copied, used or distributed without J.P. Morgan’s written approval. Copyright 2023, J.P. Morgan Chase & Co. All rights reserved.
There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer duration fixed-income securities and during periods when prevailing interest rates are low or negative.
Emerging Market securities are subject to greater risks than U.S. domestic investments. These additional risks may include exchange rate fluctuations and exchange controls; less publicly available information; more volatile or less liquid securities markets; and the possibility of arbitrary action by foreign governments, or political, economic or social instability.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.
© 2023 Van Eck Associates Corporation.
Related Funds
DISCLOSURES
ICE BofA Diversified High Yield US Emerging Markets Corporate Plus Index: is comprised of U.S. dollar-denominated bonds issued by non-sovereign emerging markets issuers that are rated below investment grade and that are issued in the major domestic and Eurobond markets.
ICE BofA US Broad Market Index: tracks the performance of US dollar denominated investment grade debt publicly issued in the US domestic market, including US Treasury, quasi-government, corporate, securitized and collateralized securities.
ICE BofA US Corporate Index: tracks the performance of US dollar denominated investment grade rated corporate debt publicly issued in the US domestic market.
ICE BofA US High Yield Index: tracks the performance of U.S. dollar-denominated below investment grade corporate debt publicly issued in the U.S. domestic market. Qualifying securities must have a below investment grade rating. Original issue zero coupon bonds, 144a securities, both with and without registration rights, and pay-in-kind securities, including toggle notes, qualify for inclusion.
ICE BofA US Treasury Index: tracks the performance of US dollar denominated sovereign debt publicly issued by the US government in its domestic market.
J.P. Morgan EMBI Global Diversified Index: tracks USD-denominated emerging markets sovereign bonds. The weighting scheme provides additional diversification by more evenly distributing weights among the countries in the index.
J.P. Morgan GBI-EM Global Core Index: tracks bonds issued by emerging markets governments and denominated in the local currency of the issuer. The weighting scheme provides additional diversification by more evenly distributing weights among the countries in the index. Countries are capped at 10% and floored between 1% to 3%.
Please note that VanEck may offer investments products that invest in the asset class(es) or industries included in this commentary.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. 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. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
An investor cannot invest directly in an index. Returns reflect past performance and do not guarantee future results. Results reflect the reinvestment of dividends and capital gains, if any. Certain indices may take into account withholding taxes. Index returns do not represent Fund returns. The Index does not charge management fees or brokerage expenses.
All indices are unmanaged and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. Certain indices may take into account withholding taxes. An index’s performance is not illustrative of the Fund’s performance. Indices are not securities in which investments can be made. The Fund’s benchmark index (50% GBI-EM/50% EMBI) is a blended index consisting of 50% J.P. Morgan Government Bond Index-Emerging Markets (GBI-EM) Global Diversified and 50% J.P. Morgan Emerging Markets Bond Index (EMBI). The J.P. Morgan GBI-EM Global Diversified tracks local currency bonds issued by Emerging Markets governments. The J.P. Morgan EMBI Global Diversified tracks returns for actively traded external debt instruments in emerging markets, and is also J.P. Morgan’s most liquid U.S dollar emerging markets debt benchmark.
Information has been obtained from sources believed to be reliable but J.P. Morgan does not warrant its completeness or accuracy. The Index is used with permission. The index may not be copied, used or distributed without J.P. Morgan’s written approval. Copyright 2023, J.P. Morgan Chase & Co. All rights reserved.
There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer duration fixed-income securities and during periods when prevailing interest rates are low or negative.
Emerging Market securities are subject to greater risks than U.S. domestic investments. These additional risks may include exchange rate fluctuations and exchange controls; less publicly available information; more volatile or less liquid securities markets; and the possibility of arbitrary action by foreign governments, or political, economic or social instability.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.
© 2023 Van Eck Associates Corporation.