Emerging-market bonds now over a quarter of global fixed income

Neuberger’s emerging-markets debt team reports that emerging-market bonds now account for more than a quarter of the global fixed-income market and recommends investors reconsider holding emerging-market debt as a distinct core allocation.

The firm says many long-established global aggregate bond funds continue to hold only small allocations to emerging-market debt. Those small weightings reflect a past view of the asset class when volatility and high-profile defaults shaped investor behavior, the team wrote.

Neuberger cited macroeconomic trends in developing economies. For the current year, real GDP growth in emerging markets is expected to be more than double that of developed markets while inflation forecasts are lower. The firm reported that measures such as trade balances, fiscal deficits and debt-to-GDP ratios are comparable with or in some cases more favorable than those in developed economies.

On credit metrics, the team described steady improvement since the COVID-19 pandemic. Sovereign issuers have recorded positive rating actions in recent years, and leverage among investment-grade emerging-market credits has remained stable at levels much lower than a decade ago. The firm estimated that leverage in investment-grade EM credits is roughly one-third of the levels seen in the U.S. and other developed markets. “Today, however, the EMD universe presents a far more balanced picture,” the team wrote.

Neuberger noted that many of the most memorable defaults in past decades were concentrated in a small number of countries, including Argentina and Thailand, rather than across the whole emerging-markets universe. The firm added that fiscal positions in many developing economies have improved over the past 30 to 40 years.

For investors seeking vehicle-level exposure, Neuberger lists the Neuberger Emerging Markets Debt Hard Currency ETF (NEMD). The firm reported a 30-day SEC yield of 5.65% and a duration of about 6.66 years for that fund. The team also stated that because some global aggregate funds underweight emerging-market bonds, separate allocations or dedicated strategies could be needed to capture the asset class’s income and diversification characteristics.

The emerging-markets debt team concluded that, given the market’s size, higher expected growth and improving credit metrics, investors and portfolio managers should reassess how much emerging-market debt they hold and whether it warrants a formal place in the core fixed-income sleeve rather than a peripheral tactical position.