Some EM Bond Approaches Carry Exposure To Rising US Rates

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Some EM Bond Approaches Carry Exposure To Rising US Rates

Some EM Bond Approaches Carry Exposure to Rising US Rates by Paul DeNoon, AllianceBernstein

With concerns about rising rates hitting a fever pitch in the US, investors have turned to emerging-market (EM) bonds to diversify risk. Unfortunately, for some, this has increased their US interest-rate risk—exactly the snake in the grass they were looking to avoid.

EM bonds have understandably attracted investors over the years. With higher growth rates than developed markets, stabilizing economies and attractive yields, the asset class has been a sensible addition to many portfolios.

But after two consecutive years of hard-to-explain returns on a popular EM bond index in 2013 and 2014, we looked under the hood to show investors that some approaches to EM bond investing can increase a risk that investors are trying to avoid.

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A Tale of Two Years

In 2013, the J.P. Morgan Emerging Market Bond Index (EMBI) suffered a devastating year, tumbling –6.58%. So which countries were the culprits? None of them. Surprisingly, EM countries weren’t to blame for the index’s downfall in 2013. In fact, despite hurdles for a few countries, it was a largely positive year for many, including Belize (+49%), Argentina (+19%), Ecuador (+15%) and Pakistan (+14%).

In 2014, the situation reversed, and the EMBI made an impressive rebound, returning +5.53% for the year. But the comeback didn’t reflect the economic la