The emerging markets bond asset class has seen a lot of traction in the past 18 months or so, with particular interest in 2017. Exceptionally high returns have had a lot to do with this as shown by the graph below.
The iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) is the most widely tracked emerging markets bond fund and has returned 8.6% in YTD 2017. In comparison, the iShares iBoxx Investment Grade Corporate Bond ETF (LQD) has returned 5%, while the SPDR Bloomberg Barclays High Yield Bond ETF (JNK) has returned 5.1%.
Lower tenor ETFs investing in government bonds have fared far worse. The only fund which comes close to the EMB’s performance is the iShares 20+ Year Treasury Bond ETF (TLT) which invests in longer maturity papers; the fund has returned 8% thus far this year.
The interesting thing to note here is that the EMB is not the best performing emerging markets bond fund. Given that several emerging markets currencies have strengthened against the US dollar, funds investing in local currency bonds have outdone their dollar-denominated peers; EMB is a fund investing in dollar-denominated bonds.
The First Trust Emerging Markets Local Currency Bond ETF (FEMB) and the VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (EMLC) have gained 14.1% and 13.5% in the year so far.
Emerging markets bond issuances
Nations classified as developing or emerging, including those on the fringes, have made use of the opportunity provided by the interest in emerging markets bonds to tap international bond markets.
The graph above displays the largest sovereign bond issuances from select countries in central Asia and Eastern Europe in the past five years. The issuance amounts pertain to the cumulative size of each countries offerings and not a single bond. Also, Bulgarian bonds were issued in euros, but have been converted to the dollar value prevailing then.
The reason that we’re analyzing this specific geography is because Tajikistan and Ukraine are on track to tap bond markets soon.
Tajikistan’s neighbor Kazakhstan had tested international waters by issuing its largest bond sale ever a little over two years ago. The planned issuance would mark Tajikistan’s debut in international bond markets and could be used a barometer for three other countries from Central Asia.
In the next article, let’s look at what Tajikistan and Ukraine’s bond issuance could mean for frontier countries on the fringes.