Vanguard Sees EM High Grade Debt as ‘Rainy Day’ Bet Amid US Risk

Investment grade bonds from select emerging market sovereigns are solid defensive bets if the US slips into recession and China’s economy worsens, according to Vanguard Asset Services.

“In a situation where a US recession takes hold, it is likely that the market will anticipate rate cuts by the Federal Reserve, which will mean that core rates rally, and by association some of the higher quality Treasury sensitive names also,” said Nick Eisinger, co-head of emerging markets active fixed-income at the fund based in London.

Investment grade sovereigns like Poland or Saudi Arabia would be resilient in this scenario, he said, adding that deceleration in the world’s top largest economies is not the base case for the fund but more of an outside risk. Vanguard has over $1.8 trillion in fixed-income assets under management globally as of early 2022.

High Grade EM Bonds Have Beat Treasuries Since 2022

Investment-grade emerging-market sovereign bonds, including Poland and Saudi Arabia, have returned 5.2% on a local currency basis since the Fed started rate hikes in March 2022 as coupon income exceeded capital losses, according to an Intercontinental Exchange index. US Treasuries have lost 8.2% during the period.