Emerging market corporate bonds have seen a performance boost over the last month following a sell-off in other developing economy assets.
On average, emerging economy corporate debt has risen 2.1% over the last month. This performance follows a fall of almost 5% over the past year, but positive returns of 3.6% over three years.
Investors yet to be tempted
In the shorter term, it appears that global ETF investors are yet to be tempted back into the corporate debt, having redeemed an accumulative $21 million over the past month.
Yet as returns were picking up over a three-year timeframe, overall global ETF investors followed, with $627 million worth of inflows since May 2015.
The boost in performance to corporate debt has come after a sell-off in recent weeks of emerging market government bonds and currencies as they reacted to a stronger US dollar and a rise in interest rates by the Federal Reserve.
Emerging market corporate debt provides ‘bargain’, say analysts
Analysts had mixed views of emerging market fundamentals and growth, but UBS said emerging market corporate bonds provided investors with an opportunity to find a bargain following the sell-off, although they pointed to Turkey and Argentina as the exceptions due to changing prices and domestic policies.
BlackRock analysts also said US dollar-denominated debt from Asia Pacific corporate issuers appeared good value.
The spread – the difference in yield between emerging and developed market corporate bonds – has also risen over the past few years, providing better value to investors, from around 1.5% in 2010 to around 4.5% today, according to Bloomberg.
ETF options limited as asset class remains volatile
Although the spread has improved, these bonds remain risky as the asset class can be volatile.
This perhaps explains why there are only three such ETFs listed in the US, which holds the lion share of the industry’s $5 trillion. The largest ETF in the segment is the VanEck Vectors Emerging Markets High Yield Bond ETF (HYEM) which has $355 million and costs 0.40% per year, the cheapest out of the three funds.
Emerging market equities are also up on average over the past month, with returns of 2.5%. Flows have been negative this month, but the funds have racked up close to $17 billion since the New Year.