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.

Should I invest in bonds now 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 do investors Favour emerging markets? ›

The pros of investing in emerging markets

Potential for high returns: The average returns for emerging markets can vary. Global asset management firm Alliance Bernstein says the MSCI EM index delivered annualised returns of 15.9% between 2001 and 2010.

What are three factors that you will consider before investing in bonds as an investor? ›

Investing in bonds requires careful consideration of various factors, such as the creditworthiness of the issuer, the bond's yield, and the bond's maturity. By understanding these factors, you can make an informed decision that aligns with your investment goals and risk tolerance.

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

Should I invest in emerging markets now? ›

Based on current market conditions, we believe the best markets to invest in right now are emerging markets like India, Brazil, and Saudi Arabia, and Bitcoin. Below, we'll explore what's driving each of these markets and what makes them such strong opportunities for investment.

What is the forecast for emerging markets in 2025? ›

A slight acceleration for advanced economies—where growth is expected to rise from 1.6 percent in 2023 to 1.7 percent in 2024 and 1.8 percent in 2025—will be offset by a modest slowdown in emerging market and developing economies from 4.3 percent in 2023 to 4.2 percent in both 2024 and 2025.

Why not to invest in emerging markets? ›

Significant negative outcomes for investors are more common in emerging markets than developed ones. As a result, foreign governments play a large role in the success of emerging markets. Asset or company seizures and significant policy shifts are among the risks investors accept when they invest there.

Which country is best to invest in 2024? ›

The Best Global Equity Markets (2024)
Country Indexin 20243 Years
Japan MSCI Japan+8.08%+16.98%
China MSCI China+7.56%-38.06%
Canada MSCI Canada+5.22%+26.83%
Austria ATX®+4.78%+21.25%
27 more rows

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.

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.

Which bond is the safest for an investor? ›

Short duration bonds are safest. Bundles of bonds in mutual funds or ETFs provide diversification. Bonds issued by local governments to fund projects. Insurance contracts providing fixed income in return for an upfront investment.

What is a primary concern for investors when it comes to bonds? ›

one key risk to a bondholder is that the company may fail to make timely payments of interest or principal. If that happens, the company will default on its bonds. this “default risk” makes the creditworthiness of the company—that is, its ability to pay its debt obligations on time—an important concern to bondholders.

What is the inflation rate for bonds in 2024? ›

If you buy an I Bond in April 2024 you will get 5.27% for 6 months, then 4.28% for the next 6 months for a combined 1 year rate of 4.83%. The April 2024 12-month I Bond rate of 4.83% is similar to CDs and Treasury Bills that are roughly 5% interest over the same time frame.

Is now a good time to buy bonds? ›

Answer: Now may be the perfect time to invest in bonds. Yields are at levels you could only dream of 15 years ago, so you'd be locking in substantial, regular income. And, of course, bonds act as a diversifier to your stock portfolio.

How much is a $100 savings bond worth after 30 years? ›

How to get the most value from your savings bonds
Face ValuePurchase Amount30-Year Value (Purchased May 1990)
$50 Bond$100$207.36
$100 Bond$200$414.72
$500 Bond$400$1,036.80
$1,000 Bond$800$2,073.60

What happens to bonds if the Fed cuts rates? ›

Bond Prices and the Fed

When the Fed increases the federal funds rate, the price of existing fixed-rate bonds decreases and the yields on new fixed-rate bonds increases. The opposite happens when interest rates go down: existing fixed-rate bond prices go up and new fixed-rate bond yields decline.

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