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LEMB: Bond ETF Disqualified As An Income Fund
Emerging-market (EM) local-currency bonds have outperformed their dollar-denominated peers in 2025, even as they offer yields lower than those of US Treasuries. The strong start to the year marks their best performance since 2022, thanks to growing expectations of rate cuts in developing nations and a cooling of global inflation.
Emerging market sovereign debt faces significant risks due to high debt levels, currency devaluations, slower growth, and rising inflation leading into 2025. Equities in high-yielding emerging markets like Brazil, Colombia, and Indonesia offer better risk-reward potential compared to sovereign debt ETFs. The SPDR Bloomberg Emerging Markets Local Bond ETF has favorable geographical exposure and unique portfolio composition, warranting a neutral rating.
Emerging markets are an attractive option for investors looking to diversify their portfolios. They offer the potential for higher returns and lower correlation with U.S. equities.
The 10-two Treasury yield spread remained negative. Exchange-traded equity funds recorded $2.6 billion in weekly net outflows.
Central banks across emerging markets have reacted to elevated inflation by significantly tightening monetary policy, in some cases, well ahead of the U.S. Federal Reserve and the European Central Bank. After largely synchronized rate-hiking cycles across EM, monetary policies could once again begin to diverge among individual countries.
In emerging markets valuations look attractive today after the losses across financial markets early this year. PIMCO's investment process is founded upon our macroeconomic outlook and our in-house country and credit research.
As the markets rebound, fixed-income investors can consider picking up some emerging market bond-related exchange traded funds. Morgan Stanley strategists led by Simon Waever advised in a note that should consider emerging market debt, making a bullish stance on the asset category for the first time since November 2020, Bloomberg reports.