EM Bonds Looking Like Fixed Income Stars

Amid expectations that the Federal Reserve is only just starting its monetary easing program, advisors and investors are rightfully focusing on Treasuries and other forms of domestic debt. However, market participants should be careful of getting too carried away with U.S. bonds. As has been the case with equities this year, opportunities abound outside of U.S. borders.

For bond investors, one of the more compelling opportunities in 2025 has been emerging markets debt — an asset class efficiently accessible via ETFs such as the Neuberger Berman Emerging Markets Debt Hard Currency ETF (NEMD).

NEMD is a fresh face on the ETF scene, having debuted in that wrapper just two months ago. However, end users can rest assured the fund is battle-tested. It existed for 12 years as an open-end mutual fund prior to converting to an ETF. It was a well-timed conversion, at that, because emerging markets bonds currently sport tailwinds, including the weak greenback.

“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,” noted Schroders. “Expensive real effective exchange rate valuations, weaker interest rate support, large twin deficits and a negative net international investment position still 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

U.S. dollar and interest rate gyrations are always material for investors considering emerging markets debt. That’s particularly so for the local currency variety held by NEMD. Higher rates and a stronger dollar can stoke elevated financing costs for developing world issuers.

Fortunately, that’s not the lay of the global fixed land today. That could signal opportunity with NEMD. Plus, some experts believe emerging markets debt issued in local currencies is one of the bond segments to embrace into 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 to Schroders.

Mexico and South Africa are both top-10 geographic exposures in NEMD.

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