EM Government Bonds Reap the Rewards of Fiscal Responsibility
February 16, 2024
Read Time 3 MIN
Even a cursory examination of emerging markets (EM) local currency sovereign debt performance over the past few years relative to developed markets (DM) counterparts reveals some interesting observations. This period has been characterized by extreme volatility across all fixed income asset classes, and EM debt investors were not insulated from this despite the high yields offered by the asset class. However, many investors may be surprised that EM local debt outperformed DM government bonds in this period - which includes the onset of COVID, unprecedented Fed tightening, a very strong dollar rally, the war in Ukraine, and a slowdown in Chinese economic growth.
EM vs DM Government Debt: 12/31/2018 – 1/31/2024
Source: J.P. Morgan and ICE Data Indices. EM Local Currency Debt represented by J.P. Morgan GBI-EM Global Divresified Index; G7 Government Debt represented by ICE BofA G7 Government Index. Past performance is no guarantee of future results. Index performance is not representative of fund performance. It is not possible to invest directly in an index.
Hard currency EM debt has outperformed both DM government bonds and EM local currency bonds by a much greater degree over the past two decades, and we believe that the same outperformance drivers have now begun to benefit local currency debt - in particular, the absence of “fiscal dominance.” It is notable that EM local currency bonds outperformed DM government bonds in 2022, an extremely bad year for most fixed income asset classes, as well as 2023 when all bonds rallied, as discussed in Bull or Bear? Emerging Markets Bonds Outperform in Both. In other words, it was not simply the U.S. economic trajectory that has been driving returns. Superior fundamentals may explain this divergence in performance in both bull and bear markets.
Low debt and deficits have allowed emerging markets monetary authorities to conduct inflation-focused monetary policy, while high debt and deficits in developed markets have diluted central bank independence and their focus on inflation. Global bond markets are now beginning to recognize the risks embedded in DM government debt and reward the responsible fiscal and monetary policies that have been pursued by many emerging markets over the past several decades. We explore these dynamics and what is means for global bond investors going forward in Fiscal Dominance: The Clarifying Lens for EM (and DM) Bonds.
Investing in EM Bonds with VanEck
The VanEck Emerging Markets Bond Fund is a high active share emerging market bond investment solution with the flexibility to invest across sovereigns, corporates, USD and local currency bonds. The fund is managed using a consistent approach across markets to find the best opportunities across the EM debt universe. The VanEck J.P. Morgan EM Local Currency Bond ETF provides access to bonds issued by emerging market governments and denominated in the local currency of the issuer, and may be attractive to investors seeking passive exposure to the broad EM local currency sovereign bond market.
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Disclosures
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
Duration measures a bond’s sensitivity to interest rate changes that reflects the change in a bond’s price given a change in yield. This duration measure is appropriate for bonds with embedded options. Carry is the benefit or cost for owning an asset. Yield to worst is a measure of the lowest possible yield that can be received on a bond with an early retirement provision. Averages are market weighted. The yields presented do not represent the performance of the Fund. These statistics do not take into account fees and expenses associated with investments of the Fund.
All indices are unmanaged and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. Certain indices may take into account withholding taxes. An index’s performance is not illustrative of the Fund’s performance. Indices are not securities in which investments can be made.
The Fund’s benchmark index (50% GBI-EM/50% EMBI) is a blended index consisting of 50% J.P. Morgan Government Bond Index-Emerging Markets (GBI-EM) Global Diversified and 50% J.P. Morgan Emerging Markets Bond Index (EMBI). The J.P. Morgan GBI-EM Global Diversified tracks local currency bonds issued by Emerging Markets governments. The J.P. Morgan EMBI Global Diversified tracks returns for actively traded external debt instruments in emerging markets, and is also J.P. Morgan’s most liquid U.S dollar emerging markets debt benchmark.
Information has been obtained from sources believed to be reliable but J.P. Morgan does not warrant its completeness or accuracy. The Index is used with permission. The index may not be copied, used or distributed without J.P. Morgan’s written approval. Copyright 2023, J.P. Morgan Chase & Co. All rights reserved.
ICE BofA G7 Government Index tracks the performance of Canada, France, Germany, Italy, Japan, UK and US sovereign debt publicly issued and denominated in the issuer's own domestic market and currency.
J.P. Morgan GBI-EM Global Diversified Index is comprised of bonds issued by emerging market governments and denominated in the local currency of the issuer.
An investment in the VanEck J.P. Morgan EM Local Currency Bond ETF (EMLC) may be subject to risks which include, among others, foreign securities, emerging market issuers, foreign currency, investing in European, Asian, Latin American, Chinese and credit, interest rate, high yield securities, sovereign bond, cash transactions, market, operational, sampling, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, issuer-specific changes, non-diversified, and index-related concentration risks, all of which may adversely affect the Fund. Emerging market issuers and foreign securities may be subject to securities markets, political and economic, investment and repatriation restrictions, different rules and regulations, less publicly available financial information, foreign currency and exchange rates, operational and settlement, and corporate and securities laws risks.
You can lose money by investing in the Emerging Markets Bond Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. The Fund is subject to risks which may include, but are not limited to, risks associated with active management, credit, credit-linked notes, currency management strategies, derivatives, emerging market issuers, energy sector, ESG investing strategy, foreign currency, foreign securities, hedging, high portfolio turnover, high yield securities, interest rate, LIBOR replacement, market, non-diversified, operational, restricted securities, investing in other funds, sovereign bond, and special risk considerations of investing in Latin American issuers, all of which may adversely affect the Fund. Emerging market issuers and foreign securities may be subject to securities markets, political and economic, investment and repatriation restrictions, different rules and regulations, less publicly available financial information, foreign currency and exchange rates, operational and settlement, and corporate and securities laws risks. Derivatives may involve certain costs and risks such as liquidity, interest rate, and the risk that a position could not be closed when most advantageous.
ESG integration is the practice of incorporating material environmental, social and governance (ESG) information or insights alongside traditional measures into the investment decision process to improve long term financial outcomes of portfolios. Unless otherwise stated within an active investment strategy’s investment objective, inclusion of this statement does not imply that an active investment strategy has an ESG-aligned investment objective, but rather describes how ESG information may be integrated into the overall investment process.
Investors should consider the Fund’s investment objective, risks, charges, and expenses of the investment company carefully before investing. Bond and bond funds will decrease in value as interest rates rise. The prospectus and summary prospectus contain this and other information. Please read them carefully before investing. Please call 800.826.2333 or visit vaneck.com for performance information current to the most recent month end and for a free prospectus and summary prospectus.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Securities Corporation.
© 2024 Van Eck Securities Corporation, Distributor, a wholly-owned subsidiary of Van Eck Associates Corporation.
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Disclosures
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
Duration measures a bond’s sensitivity to interest rate changes that reflects the change in a bond’s price given a change in yield. This duration measure is appropriate for bonds with embedded options. Carry is the benefit or cost for owning an asset. Yield to worst is a measure of the lowest possible yield that can be received on a bond with an early retirement provision. Averages are market weighted. The yields presented do not represent the performance of the Fund. These statistics do not take into account fees and expenses associated with investments of the Fund.
All indices are unmanaged and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. Certain indices may take into account withholding taxes. An index’s performance is not illustrative of the Fund’s performance. Indices are not securities in which investments can be made.
The Fund’s benchmark index (50% GBI-EM/50% EMBI) is a blended index consisting of 50% J.P. Morgan Government Bond Index-Emerging Markets (GBI-EM) Global Diversified and 50% J.P. Morgan Emerging Markets Bond Index (EMBI). The J.P. Morgan GBI-EM Global Diversified tracks local currency bonds issued by Emerging Markets governments. The J.P. Morgan EMBI Global Diversified tracks returns for actively traded external debt instruments in emerging markets, and is also J.P. Morgan’s most liquid U.S dollar emerging markets debt benchmark.
Information has been obtained from sources believed to be reliable but J.P. Morgan does not warrant its completeness or accuracy. The Index is used with permission. The index may not be copied, used or distributed without J.P. Morgan’s written approval. Copyright 2023, J.P. Morgan Chase & Co. All rights reserved.
ICE BofA G7 Government Index tracks the performance of Canada, France, Germany, Italy, Japan, UK and US sovereign debt publicly issued and denominated in the issuer's own domestic market and currency.
J.P. Morgan GBI-EM Global Diversified Index is comprised of bonds issued by emerging market governments and denominated in the local currency of the issuer.
An investment in the VanEck J.P. Morgan EM Local Currency Bond ETF (EMLC) may be subject to risks which include, among others, foreign securities, emerging market issuers, foreign currency, investing in European, Asian, Latin American, Chinese and credit, interest rate, high yield securities, sovereign bond, cash transactions, market, operational, sampling, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, issuer-specific changes, non-diversified, and index-related concentration risks, all of which may adversely affect the Fund. Emerging market issuers and foreign securities may be subject to securities markets, political and economic, investment and repatriation restrictions, different rules and regulations, less publicly available financial information, foreign currency and exchange rates, operational and settlement, and corporate and securities laws risks.
You can lose money by investing in the Emerging Markets Bond Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. The Fund is subject to risks which may include, but are not limited to, risks associated with active management, credit, credit-linked notes, currency management strategies, derivatives, emerging market issuers, energy sector, ESG investing strategy, foreign currency, foreign securities, hedging, high portfolio turnover, high yield securities, interest rate, LIBOR replacement, market, non-diversified, operational, restricted securities, investing in other funds, sovereign bond, and special risk considerations of investing in Latin American issuers, all of which may adversely affect the Fund. Emerging market issuers and foreign securities may be subject to securities markets, political and economic, investment and repatriation restrictions, different rules and regulations, less publicly available financial information, foreign currency and exchange rates, operational and settlement, and corporate and securities laws risks. Derivatives may involve certain costs and risks such as liquidity, interest rate, and the risk that a position could not be closed when most advantageous.
ESG integration is the practice of incorporating material environmental, social and governance (ESG) information or insights alongside traditional measures into the investment decision process to improve long term financial outcomes of portfolios. Unless otherwise stated within an active investment strategy’s investment objective, inclusion of this statement does not imply that an active investment strategy has an ESG-aligned investment objective, but rather describes how ESG information may be integrated into the overall investment process.
Investors should consider the Fund’s investment objective, risks, charges, and expenses of the investment company carefully before investing. Bond and bond funds will decrease in value as interest rates rise. The prospectus and summary prospectus contain this and other information. Please read them carefully before investing. Please call 800.826.2333 or visit vaneck.com for performance information current to the most recent month end and for a free prospectus and summary prospectus.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Securities Corporation.
© 2024 Van Eck Securities Corporation, Distributor, a wholly-owned subsidiary of Van Eck Associates Corporation.