The World Hungers For Emerging Market Bonds

Despite being one of Eastern Europe's most indebted nations, Hungary is considered a safer borrower than Spain. The cost of credit default swaps (CDS) on Spanish bonds has risen to around 261.9bp. Meanwhile, insuring against a Hungarian default has fallen to 255bp. This is just one example of the shift towards developing markets debt. Total assets for funds that specialize in emerging market debt have more than doubled since the end of 2009, to approximately $181 billion in AUM. With many developed market central banks continuing to keep interest rates at historically low levels, many institutional investors have increased their allocation to emerging markets debt as way to capture yield. Add this to many emerging markets vastly improving financial situations, and you have a recipe for success. Investor interest has predominantly been towards locally denominated bonds as the major currencies (dollar, euro) have fallen. Appreciating currencies add to the overall total returns when converted back into dollars. So far, local currency-denominated emerging market government bonds have returned 18.1% over the past 12 months when including exchange-rate appreciation. With some analysts calling for the long decline of the dollar, these bonds will certainly benefit even more. For investors there are now plenty of options for portfolios with regards to local-currency emerging market debt. The Market Vectors EM Local Currency Bond ETF EMLC, WisdomTree Emerging Markets Local Debt ELD and WisdomTree Asia Local Debt ETF ALD are great ways to access the asset class and add some yield to a portfolio.