The emerging bonds market always poses an elevated risk-return scenario. Since these bonds generally carry a higher risk compared to the more mature markets, they also present a higher return. One of the most interesting emerging bond funds that have given investors a good return all through the pandemic is the iShares J.P Morgan USD Emerging Markets Bond ETF [NASDAQ: EMB].
It has been on an uptrend for the better part of 2020, despite the overall market volatility. If recent indicators are anything to go by, this fund is still overall bullish. A look at the options outflow sentiment for EMB shows an increase in call options relative to put options. This means that most options traders expect this fund to keep gaining in value. There are several reasons behind the increased optimism in this fund. Some of them are as below:
Interest rates are too low in the mature markets
Interest rates in the U.S and most of the developed world have been close to zero for a decade now. With COVID-19 hitting markets hard, rates are likely to remain low for much longer. This leaves bond funds chasing gains to look into emerging markets for investments. As such, all funds that want gains have turned to the emerging markets, and the result has been a consistent increase in the value of EMB over the past few months and the positive outlook on the fund by options traders.
Central Bank interventions in emerging economies
The COVID-19 pandemic has ravaged the world economy, and weak emerging economies have borne the brunt of it. As such, their central banks have had to take measures to protect economies, and that includes foreign borrowing. Due to the weakened economies, most of them have had to borrow at rates that are much higher than the rest of the markets. This has created an opportunity for investors to make superior gains on such bonds despite the challenges posed by the COVID-19 pandemic.
There are two types of emerging markets, namely those dominated in local currencies and those dominated in dollars. Due to the higher risks in these markets, foreign investors go for dollar-denominated bonds. Due to the economic weakness caused by COVID-19, most emerging economy currency have weakened against the dollar and this favours investors in dollar-denominated bonds.
About iShares J.P Morgan USD Emerging Markets Bond ETF
iShares J.P Morgan USD Emerging Markets Bond ETF is a USD denominated index tat that tracks emerging markets bonds.