Investors are increasingly turning to emerging-market bonds as they are predicted to outperform AI stocks in 2024. The weakening US dollar is a key factor driving this trend, as foreign countries and companies often borrow in US dollars but need to service the debt in their own currency. The Federal Reserve is expected to implement three rate cuts throughout the year, further benefiting emerging-market bonds. M&G Investments has indicated that falling rates will 'set emerging market debt free,' enhancing its attractiveness to investors. Two closed-end funds (CEFs) that are recommended for investing in emerging-market bonds are the Western Asset Emerging Markets Debt Fund (EMD) and the AllianceBernstein Global High Income Fund (AWF). Both funds offer dividends of over 7.5% and hold significant discounts to net asset value. EMD holds a diversified portfolio of emerging-market debt, while AWF has a longer track record of success and invests in a variety of bonds. With the expected rate cuts and weakening US dollar, emerging-market bonds are poised to perform well. Investors can capitalize on this opportunity by diversifying their portfolios with high-yielding assets and carefully evaluating investment options.
Ecuador's dollar bonds have experienced a significant increase, leading gains among developing nations, following signs of a new financing deal with the International Monetary Fund (IMF) nearing completion. The bonds due in 2040 rose 2.5 cents to 50.4 cents on the dollar, the highest level since June 2022. Similarly, the debt due in 2035 rose 2.4 cents to 54.4 cents on the dollar, the highest level since January 2023. Ecuador's Finance Minister, Juan Carlos Vega, has stated that the country is in advanced talks with the IMF and hopes to make a positive announcement soon regarding a staff-level agreement. Ecuadorian bonds have seen a return of nearly 56% this year, outperforming other emerging-market sovereign peers. The yield spread, which represents the additional yield investors demand to hold the debt over US Treasuries, has also decreased significantly this year to about 12 percentage points.
Investment flows into emerging markets have been poor since the Covid pandemic, but recent developments indicate a shift. Nearly $40 billion flowed into China equity funds in the first week of October 2024, doubling the previous weekly record. EPFR has reported record high inflows for all emerging markets equity funds, and emerging-market debt funds are experiencing their longest streak of inflows in over a year. However, caution is being advised by some investment managers. David Nava, lead manager of the $1.8 billion RBC Emerging Markets Bond Fund, has raised cash to prepare for a potential downturn, noting that the yield spread between emerging market debt and US Treasuries is historically low. He has managed RBC's EM bond assets since 2010 and believes that emerging market sovereign bonds are currently expensive. As of August 30, 2024, the fund has returned 7.92%, outperforming its category, with key investments in countries like Egypt, Ecuador, Argentina, and Mexico, while remaining cautious on Venezuela due to its economic decline. Current market conditions reflect a shift from pessimism to a more benign outlook, with EM spreads falling from 265 basis points to 208 basis points. Nava is preparing for potential market re-pricing and is accumulating cash to reposition the portfolio when valuations become more attractive. This balanced perspective highlights the dual nature of the emerging market bond landscape, where opportunities coexist with significant risks. [7a22fdad] [3611b8a1] [e8afd76d] [9fb77498] [75f2e2e5]