Investment grade bonds from select emerging market sovereigns are solid defensive bets if the US slips into recession and China’s economy worsens, according to Vanguard Asset Services.
(Bloomberg) — Investment grade bonds from select emerging market sovereigns are solid defensive bets if the US slips into recession and China’s economy worsens, according to Vanguard Asset Services.
“In a situation where a US recession takes hold, it is likely that the market will anticipate rate cuts by the Federal Reserve, which will mean that core rates rally, and by association some of the higher quality Treasury sensitive names also,” said Nick Eisinger, co-head of emerging markets active fixed-income at the fund based in London.
Investment grade sovereigns like Poland or Saudi Arabia would be resilient in this scenario, he said, adding that deceleration in the world’s top largest economies is not the base case for the fund but more of an outside risk. Vanguard has over $1.8 trillion in fixed-income assets under management globally as of early 2022.
Investment-grade emerging-market sovereign bonds, including Poland and Saudi Arabia, have returned 5.2% on a local currency basis since the Fed started rate hikes in March 2022 as coupon income exceeded capital losses, according to an Intercontinental Exchange index. US Treasuries have lost 8.2% during the period.
Eisinger’s comments show how investors are bracing for the risk of possible US recession even with Wall Street increasingly betting that the Fed has navigated the US economy toward a soft landing. On the other side of the globe, investors are still waiting to see if a slew of measures from Chinese authorities to stimulate the economy would bear fruit.
Steps from Chinese authorities to support the economy are “still quite piecemeal,” Eisinger said, adding that “it seems to us, and the investor community in general, that they’re sort of just doing enough to maintain some bare degree of confidence.”
An emerging markets bond fund Eisinger helps manage has beaten 94% of its peers over the last year, according to data compiled by Bloomberg.
Vanguard sees opportunity to add exposure to investment grade debt from emerging markets as he expects fresh bond supply to widen their yield spreads over Treasuries. “That’s kind of what we’d call our rainy day exposure,” he said.
–With assistance from Masaki Kondo.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.