Bargain-Based Bond Exposure Is Available in Emerging Markets

The U.S. bond market might be reeling, but investors can always look elsewhere for more opportunities when it comes to yield or diversified exposure. One place to hunt for bargains is emerging markets (EM).

“It’s true that economic uncertainty remains in Russia,” a Kiplinger’s article explains. “But investors willing to stick their necks out and buy small positions or dollar-cost average into emerging markets bonds could be double-rewarded with high yields and above-average returns, especially once the Russia-Ukraine conflict begins to stabilize.”

EM bonds were particularly hit hard when the pandemic hit in 2020. Just like the U.S. Federal Reserve, some central banks looked to stabilize their respective economies by loading up their balance sheets with government bonds.

That, of course, will pose some risks. The International Monetary Fund (IMF) warned that EM banks are holding copious amounts of government debt — that could pose systemic risks should EM governments default, and thus could expose banks to risk which, in turn, offer credit to EM governments.

“The pandemic has left emerging-market banks holding record levels of government debt, increasing the odds that pressures on public-sector finances could threaten financial stability,” the IMF says in a blog. “Authorities should act quickly to minimize that risk.”

Nonetheless, reward doesn’t come without risks. Those willing to accept the risk can look to EM bonds for opportunities.

EM Bond Exposure at a Low Cost

Getting EM bond exposure doesn’t have to come at a great expense. With its 0.20% expense ratio, the Vanguard Emerging Markets Government Bond Index Fund ETF Shares (VWOB) costs less than its category average.

VWOB seeks to track the performance of a benchmark index that measures the investment return of U.S. dollar-denominated bonds issued by governments and government-related issuers in emerging market countries. The fund employs an indexing investment approach designed to track the performance of the Bloomberg USD Emerging Markets Government RIC Capped Index.

The fund offers diversified exposure to EM bonds with its top three country allocations being Mexico, Saudi Arabia, and Indonesia. Average duration falls within the intermediate term at about eight years, and the fund has a 30-day SEC yield of 5.43% as of April 13.

For more news, information, and strategy, visit the Fixed Income Channel.