The big picture: Vanguard’s active fixed income team believes EM bonds could outperform much of the rest of the fixed income market in 2024 because of the likelihood of declining global interest rates, the current yield premium over U.S. investment-grade bonds, and a longer duration profile than U.S. high-yield.
Why it matters: Advisors typically need to proactively allocate to EM bonds, since they are often a small part of core or core-plus strategies and typically not included in model portfolios.
Strong returns in 2023: EM bonds, as measured by the JPMorgan EMBI Global Diversified Index, returned 11.1% last year. A key driver of strong EM credit returns in 2023 was a supportive demand and supply dynamic. Investment grade (IG) issuers outperformed their fiscal budgets in 2023, limiting their need to issue debt. High-yield (HY) issuers faced prohibitively high funding costs comprised of high treasury yields plus wide spreads and turned instead to official creditors for funding.
As EM IG spreads tightened due to the lack of supply throughout 2023, we used the opportunity to rotate out of EM IG into high-yield EM issuers where our team identified compelling valuations coupled with improving fundamentals. Additionally, we sought exposure in EM local currency bonds, capitalizing on falling inflation and high real yields in EM economies. In our multi-sector funds, we substituted out EM IG for U.S. credit where valuations were more attractive.
Expecting another strong year in 2024: Coming into this year, we were defensively positioned in EM IG, expecting more normal totals of debt supply to push spreads wider. Following large front-loaded new issue supply, EM IG spreads are now at attractive levels versus U.S. credit and set up EM debt for outperformance. Our 2024 macroeconomic base case features slowing inflation and growth cushioned by FED rate cuts. This environment is supportive of fixed income assets in general and credit assets in particular.
In addition to attractive valuations, the EM asset class benefits from a unique combination of wide spreads and long duration, something that neither U.S. IG nor U.S. HY can offer. This leaves EM debt uniquely poised to benefit from a rally in rates as central banks cut and supportive risk appetite as growth normalizes. With strong investor demand for fixed income assets and historically expensive valuations in U.S. corporate bonds, EM debt is likely to benefit from increased investor demand. This demand is likely to overwhelm supply in the coming month, helping drive outperformance in EM debt.
How to access:
Three Vanguard products offer significant exposure to emerging markets bonds:
Active
Vanguard Emerging Markets Bond Fund (VEGBX)
Vanguard Multi-Sector Income Bond Fund (VMSAX)
Index
Emerging Markets Government Bond ETF (VWOB)
For more information about Vanguard funds or Vanguard ETFs, visit advisors.vanguard.com or call 800-997-2798 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.
Past performance is no guarantee of future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. All investing is subject to risk, including possible loss of principal. Diversification does not ensure a profit or protect against a loss.
Bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline.
Investments in bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.
Bonds of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets.
High-yield bonds generally have medium- and lower-range credit-quality ratings and are therefore subject to a higher level of credit risk than bonds with higher credit-quality ratings.
This article is listed under
FAQs
Vanguard's active fixed income team believes emerging markets (EM) bonds could outperform much of the rest of the fixed income market in 2024 because of the likelihood of declining global interest rates, the current yield premium over U.S. investment-grade bonds, and a longer duration profile than U.S. high yield.
Why invest in bonds in 2024? ›
Positive Signals for Future Returns
At the beginning of 2024, bond yields, the rate of return they generate for investors, were near post-financial crisis highs1—and for fixed-income, yields have historically served as a good proxy for future returns.
Are emerging market bonds a good investment? ›
Consider EM bonds carefully
The relatively high yields and likelihood of rate cuts by global central banks have created a tactical investment opportunity. In addition to high yields, EM local-currency bonds can provide diversification and the potential for capital gains.
Why is it good to invest in emerging markets? ›
An emerging market has the potential for strong economic growth. It is more established than a frontier market, which is usually deemed too small or risky but less than a developed one. They can be attractive to investors due to their rapid growth prospects, but they can be volatile and, therefore, risky.
What three factors must an investor consider when choosing a bond? ›
There are three key things to consider when choosing a bond as a source of income: the coupon, the credit quality of the issuer and the time to maturity.
Why invest in emerging markets in 2024? ›
Expecting another strong year in 2024
Following large front-loaded new issue supply, EM IG spreads are now at attractive levels versus U.S. credit, setting up EM debt for outperformance. Our 2024 macroeconomic base case features slowing inflation and growth cushioned by Fed rate cuts.
What are the stock market predictions for 2024? ›
Wall Street analysts' consensus estimates predict 3.6% earnings growth and 3.5% revenue growth for S&P 500 companies in the first quarter. Analysts project full-year S&P 500 earnings growth of 11.0% in 2024, but analysts are more optimistic about some market sectors than others.
What is the best emerging market to invest in? ›
Cambodia Tops the List
| Country | GDP Growth | Growth in FDI Projects (CAGR '21-'23) |
|---|
| 🇰🇭 Cambodia | 6.1% | 110% |
| 🇵🇭 Philippines | 5.9% | 51% |
| 🇰🇪 Kenya | 5.3% | 50% |
| 🇮🇶 Iraq | 2.9% | 95% |
6 more rowsApr 2, 2024
Should I only buy bonds when interest rates are high? There are advantages to purchasing bonds after interest rates have risen. Along with generating a larger income stream, such bonds may be subject to less interest rate risk, as there may be a reduced chance of rates moving significantly higher from current levels.
What is the downside of investing in bonds? ›
Historically, bonds have provided lower long-term returns than stocks. Bond prices fall when interest rates go up. Long-term bonds, especially, suffer from price fluctuations as interest rates rise and fall.
Emerging markets are often attractive to foreign investors due to the high return on investment they can provide. In the transition from being an agriculture-based economy to a developed economy, countries often require a large influx of capital from foreign sources due to a shortage of domestic capital.
Do emerging markets do well in recession? ›
If a US recession is on the way would only make more of a case for greater diversification in global portfolios – a positive for emerging markets. A recession would entail lower inflation and, as a result, lower US interest rates.
What are the problems with investing in emerging markets? ›
Because emerging markets are viewed as being riskier, they have to issue bonds that pay higher interest rates. The increased debt burden further increases borrowing costs and strengthens the potential for bankruptcy. Still, this asset class has left much of its unstable past behind.
Are bonds a good investment in 2024? ›
There are indications that interest rates may start to fall in the near future, with widespread anticipation for multiple interest rate cuts in 2024. Falling rates offer the potential for capital appreciation and increased diversification benefits for bond investors.
Is now a good time to buy bonds? ›
If an investor is looking for reliable income, now can be a good time to consider investment-grade bonds. If an investor is looking to diversify their portfolio, they should consider a medium-term investment-grade bond fund which could benefit if and when the Fed pivots from raising interest rates.
What is the safest bond to invest in? ›
Treasuries are generally considered"risk-free" since the federal government guarantees them and has never (yet) defaulted. These government bonds are often best for investors seeking a safe haven for their money, particularly during volatile market periods. They offer high liquidity due to an active secondary market.
Why are investors buying bonds now? ›
We'd rather lock in high yields now than risk earning lower yields down the road. For investors in or near retirement, locking in these high yields with high quality investments means that you likely don't need to invest as heavily in riskier investments to meet your goals.
Should you buy bonds when interest rates are high? ›
Should I only buy bonds when interest rates are high? There are advantages to purchasing bonds after interest rates have risen. Along with generating a larger income stream, such bonds may be subject to less interest rate risk, as there may be a reduced chance of rates moving significantly higher from current levels.
Why are bonds a good long-term investment? ›
Historically, bonds are less volatile than stocks.
Bond prices will fluctuate, but overall these investments are more stable, compared to other investments. “Bonds can bring stability, in part because their market prices have been more stable than stocks over long time periods,” says Alvarado.
Will bond ETFs go up in 2024? ›
Bond ETFs can offer several potential advantages for investors in 2024, as many analysts expect the economy to slow or enter a recession, which could lead to price appreciation. Bond ETFs also offer other benefits, such as income generation and diversification.
