With the US Treasury bonds now at ultra-low yield levels, investors are looking at alternate sources of income from their investment portfolios.
One asset class which has attracted a lot of investors’ interest recently is emerging markets debt, as it provides an opportunity to earn much higher yields with capital appreciation, while adding diversification benefits to the portfolio.
The case of investing in emerging markets sovereign debt seems to be pretty strong now. Many emerging countries now have better fiscal health and lower debt levels than their developed counterparts. Healthy emerging economies also have adequate levels of foreign exchange reserves and deep and liquid financial markets. Thus the chances of sovereign default are extremely low.
Further, while interest rates are at rock-bottom levels in the US and can only go up from the current levels, the rates in emerging countries are still high. The central banks in many of these countries were raising rates till last year but reversed the monetary cycle later last year or earlier this year, as the growth slowed and inflation came within their acceptable range.
“Investors looking for true diversification in their portfolios and higher longer-term return should consider investing in emerging markets local currency bond ETFs,” says Neena Mishra, CFA of Zacks Investment Research. “In addition to greater return potential in the long-term, these ETFs are less sensitive to interest rate changes compared with USD denominated debt ETFs due to their shorter duration (four to five years) compared with the duration of two USD denominated emerging market debt ETFs (seven to nine years).”