As the Federal Reserve embarks on its monetary easing program, both advisors and investors are turning their attention to Treasuries and other forms of domestic debt. However, it’s crucial for market participants to remain cautious and not overlook the potential opportunities that lie beyond U.S. borders. Just like in the equity markets this year, there are promising prospects waiting to be explored internationally.
For bond investors, one of the most intriguing opportunities in 2025 is emerging markets debt. This asset class is easily accessible through ETFs, such as the Neuberger Berman Emerging Markets Debt Hard Currency ETF (NEMD).
NEMD is a relatively new entrant in the ETF market, having launched just two months ago. However, investors can feel confident in its performance history, as it previously operated as an open-end mutual fund for 12 years before its conversion to an ETF. This transition comes at an opportune time, as emerging markets bonds are currently benefiting from favorable conditions, including a weakening U.S. dollar.
According to Schroders, “The US dollar is likely to resume its cyclical downturn after a period of consolidation. While short-term sentiment indicators suggest the greenback is oversold, structural pressures persist. Expensive real effective exchange rate valuations, weaker interest rate support, large twin deficits, and a negative net international investment position exceeding 80% of GDP all point to sustained dollar weakness. Importantly, the greenback has now broken its long-term 15-year uptrend.”
Stars Aligning for NEMD
Fluctuations in the U.S. dollar and interest rates are always significant for investors considering emerging markets debt, particularly for the local currency variety held by NEMD. Higher rates and a stronger dollar can lead to increased financing costs for issuers in developing countries.
Fortunately, the current landscape of global fixed income does not reflect this scenario, potentially signaling a favorable opportunity for NEMD. Some experts even suggest that emerging markets debt issued in local currencies is a segment worth embracing as we approach year-end.
“EM local debt remains our top sectoral pick. Dollar weakness, high real yields, the prospects of monetary easing in the context of well-behaved EM inflation, and an incipient recovery in fund flows should continue to boost returns. We estimate that a diversified EM local debt portfolio could generate an expected 12-month return above 11%, notably thanks to high-yielding government bonds in countries such as Brazil, Mexico, South Africa, Hungary, India, Turkey, and Egypt,” reported Schroders.
Notably, Mexico and South Africa rank among the top-10 geographic exposures in NEMD.
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