Emerging Market Bonds Could Be 2024 Fixed Income Winners

Domestic aggregate bond strategies are on pace for decent showings this year. And there is mounting speculation that the Federal Reserve will lower interest rates next year, perhaps multiple times. So enthusiasm for bonds and related exchange traded funds is perking up. That doesn’t mean investors should limit 2024 fixed income ETF considerations to U.S. fare. The dollar is already retreating, implying market participants are comfortable with the idea of Fed rate cuts. So emerging market bonds could be worth considering in 2024.

Enter the VanEck J.P. Morgan EM Local Currency Bond ETF (EMLC) and the VanEck Emerging Markets High Yield Bond ETF (HYEM).

Emerging market equities are again disappointing investors this year. But the tale of the tape for bonds is markedly different. EMLC and HYEM are sharply outpacing the MSCI Emerging Markets Index. Yet the VanEck ETFs are doing so with significantly higher yields and noticeably less annualized volatility.

Emerging Market Bonds Worth a Look

As its name indicates, EMLC holds bonds that are denominated in local currencies. Understandably, many investors think that a weaker dollar, which means strong currencies elsewhere in the world, is punitive for the issues held by EMLC. However, recent price action suggests otherwise.

For instance, EMFX has rallied over the past two months as U.S. bond yields have declined, but has contributed only approximately +1.3% to a total return of approximately +8.4% this year. We believe a similar dynamic could play out next year, with EMFX supported but carry being the primary driver of total return,” according to VanEck research.

The $3 billion EMLC offers some buffer against downside with a 30-day SEC yield of 6.56%. Additionally, more than 70% of the fund’s holdings carry investment-grade ratings. And the bulk of its largest country exposures are unlikely to raise interest rates next year.