The initial steps of the process to begin “tapering” in the US could cause some bond buyers to dial back their risk profiles, according to Fran Rodilosso, fixed income portfolio manager with Market Vectors ETFs.
“The likelihood of continued Fed tapering in 2014 implies a shift in the supply/demand equation for spread funds next year,” says Rodilosso (pictured). “When you ultimately remove what was until last week USD85bn per month of demand for higher quality bonds, at least at the margin, some buyers are going to come back down the risk curve.”
“Earlier this year, some fixed income asset classes, including emerging markets (EM) local currency sovereign, and EM hard currency corporate and sovereign bonds, reacted violently to the prospect of tapering and therefore are ending the year having underperformed their developed market counterparts,” Rodilosso says. “However, looking forward to 2014, I would highlight that EM bonds represent one area of fixed income where pockets of value still may remain. Local markets that were beaten up over the summer may not have fully recovered. At the same time, corporate credit spreads have moved meaningfully wider versus their US counterparts.”
The Market Vectors EM Aggregate Bond Index tracks the performance of the EM bond universe, covering local currency and hard currency sovereign and corporate bonds. This index was designed to play a role in helping to benchmark manager performance versus the broad opportunity set of EM bonds.
In addition, Market Vectors also launched an ETF earlier this month that is designed to track the index. The Market Vectors EM Aggregate Bond ETF offers a diversified, all-in-one approach to investing in EM bonds, in a liquid, transparent ETF format.