JPMB - Four Looming Risks That Could Bolster EM Bonds
2024-02-21 04:54:00 ET
Summary
- In January, the VanEck Emerging Markets Bond Fund was down 0.84% in January, compared to -1.27% for its benchmark.
- When and if the Fed starts cutting its policy rate, EM bonds should perform better than most bond categories.
- Low debt levels in EM governments allow their central banks to solely focus on inflation, while high debt levels in DM governments force their central banks to focus on multiple objectives (not just inflation).
Many investors are not pricing in four risks in their portfolios. Each of these risks hurts DM bonds and currencies, but helps emerging markets bonds and currencies.
In January, the VanEck Emerging Markets Bond Fund was down 0.84% in January, compared to -1.27% for its benchmark, the 50% J.P. Morgan Government Bond Index-Emerging Markets (GBI-EM) Global Diversified and 50% J.P. Morgan Emerging Markets Bond Index (EMBI). China was by far the biggest outperformer for the Fund, with Chile the largest underperformer. We increased exposure to Mexico and Poland local currency, covering an underweight exposure, and reduced our South Africa local exposure (where we now have zero exposure). We ended January with carry of 7.0%, yield to worst of 8.7%, duration of 5.8, and 52.7% of the Fund in local currency. Our biggest exposures are Mexico (local and hard), Brazil (primarily local), China (primarily hard), Colombia (primarily local), and Indonesia (primarily local)....
Four Looming Risks That Could Bolster EM Bonds