Why investors should consider emerging markets bonds in 2024 (2024)

Expert insight

February 22, 2024

Why investors should consider emerging markets bonds in 2024 (1)

Daniel Shaykevich

Principal, Senior Portfolio Manager, Manager Emerging Markets

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.

Key highlights

  • The current environment is supportive of fixed income assets, in general, and EM bonds, in particular.
  • Owing to their unique return profile, EM bonds should stand to benefit if the Federal Reserve and other central banks cut interest rates, as expected.
  • Valuations on EM bonds look attractive relative to U.S. investment-grade and high-yield bonds. New issuance in January helped improve valuations.

Why it matters

Investors 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 composed 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 and into EM HY 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, setting 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 from supportive risk appetite as growth normalizes. With historically expensive valuations in U.S. corporate bonds and strong investor demand for fixed income assets, EM debt stands to benefit. Increasing demand is likely to overwhelm supply in the coming months, helping drive outperformance in EM debt.

EM bonds offer compelling valuations

Why investors should consider emerging markets bonds in 2024 (2)

Note: Emerging markets credit represented by JPMorgan EMBI Global Diversified Index, U.S. investment grade represented by Bloomberg U.S. Corporate Bond Index, and U.S. high yield represented by Bloomberg Corporate High Yield Index.

Sources: Bloomberg and JPMorgan, as of January 30, 2024.

EM IG and HY spreads are near their most attractive levels versus U.S. credit in two years

Sources: Bloomberg and JPMorgan, as of January 30, 2024.

EM IG issuance is particularly front-loaded in 2024 with 47% of expected issuance completed

Why investors should consider emerging markets bonds in 2024 (4)

Note: Full-year 2024 emerging markets investment-grade issuance is a forecast.

Source: Bloomberg, as of January 30, 2024.

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

Vanguard Emerging Markets Government Bond ETF (VWOB)

Related links:
  • Active fixed income and our ownership structure (article, issued February 2024)
  • Vanguard active fixed income perspectives Q1 2024: Yield mountain(article, issued February 2024)

Notes:

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.

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Why investors should consider emerging markets bonds in 2024 (5)

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Why investors should consider emerging markets bonds in 2024 (2024)

FAQs

Why investors should consider emerging markets bonds in 2024? ›

Among the opportunities in the fixed income markets in 2024, local-currency EM bonds may be one to consider for investors with a higher risk tolerance. The relatively high yields and likelihood of rate cuts by global central banks have created a tactical investment opportunity.

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.

Why invest in emerging markets in 2024? ›

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 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 are three reasons why investors should consider adding bonds to their portfolios? ›

Investors include bonds in their investment portfolios for a range of reasons including income generation, capital preservation, capital appreciation and as a hedge against economic slowdown.

What is the performance of emerging markets in 2024? ›

Key takeaways. First quarter of 2024 had positive returns in emerging markets (EM). No clear style leadership during the quarter with Value, Growth and Core styles largely aligned. January marked a turning point where the market began to reward earnings delivery, especially in China.

What are the emerging markets expected returns in 2024? ›

Constructive outlook, despite loaded election calendar and geopolitical risks. Emerging markets' growth is expected to remain steady in 2024 at around 4%.

Which bond to invest in 2024? ›

The Best Bond ETFs for 2024's Economy
TickerFundExpense Ratio
BLVVanguard Long-Term Bond ETF0.04%
ZROZPIMCO 25+ Year Zero Coupon US Treasury ETF0.15%
VCITVanguard Intermediate-Term Corporate Bond ETF0.04%
IEFiShares 7-10 Year Treasury Bond ETF0.15%
6 more rows

Will 2024 be good for stocks? ›

Fortunately, analysts see positive earnings and revenue growth for all eleven market sectors this year. The healthcare sector is expected to generate a market-leading 17.8% earnings growth in 2024, while the information technology sector is expected to lead the way with 9.3% revenue growth.

Which fund to invest in 2024? ›

Best 10 Performing Funds in Q1 2024
FundMedalist RatingMarch Return
GQG Partners Global EquityGold2.79
Neuberger Berman 5G CnnctvtyBronze3.54
IFSL Meon Adaptive GrowthNeutral7.29
VT Tyndall North AmericanNegative3.95
6 more rows
Apr 4, 2024

Are emerging market bonds a good investment? ›

Consider EM bonds carefully

Among the opportunities in the fixed income markets in 2024, local-currency EM bonds may be one to consider for investors with a higher risk tolerance. The relatively high yields and likelihood of rate cuts by global central banks have created a tactical investment opportunity.

What is the outlook for emerging market bonds? ›

Resilient EM growth outlook remains intact

We expect EM growth to be around 4% in 2024, supported by stability in Asia and an expected recovery in Latin America in the second half of the year. We have revised our US growth forecasts upwards and expect sub-trend growth in Europe, with a gradual stabilisation.

Why do investors prefer to invest in bonds? ›

Investors buy bonds because: They provide a predictable income stream. Typically, bonds pay interest on a regular schedule, such as every six months.

Why are investors attracted to the bond market? ›

Bonds have the added benefit of offering interest at a set rate that is often higher than short-term savings rates. Income: Most bonds provide the investor with “fixed” income.

What is one reason investors may prefer bonds over stocks? ›

Unlike stocks, bonds come with fixed interest rates that promise a certain return. No matter how the value of the bond fluctuates, you are assured a specific percentage yield on your initial investment⎯albeit a slightly lower one than what you might expect from a stock investment.

Is 2024 a good time to purchase interest-sensitive securities? ›

Others have said that 2024 might be the time to invest toward the longer end of the risk-return spectrum. In a December article, for example, Morningstar indicated that investors are best off locking in current high interest rates and investing at the outer end of the spectrum.

Are high-yield bonds a good investment in 2024? ›

Bond Outlook Favors High-Yield Over Investment-Grade Corporates. We remain upbeat about the performance prospects for high-yield and investment-grade corporate bonds in 2024.

Should I be investing in bonds right now? ›

High-quality bond investments remain attractive. With yields on investment-grade-rated1 bonds still near 15-year highs,2 we believe investors should continue to consider intermediate- and longer-term bonds to lock in those high yields.

Why are bonds a good long term investment? ›

Pro: 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.

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