Investors have been running to safety since 2008, buying up bonds and driving up prices in the process. It’s what many believe to be the grand finale to a 30-year bond bull, fueled by low interest rates that have seen bond investors benefit handsomely. The end is nigh, however. With interest rates hovering at 0, they can only go up from here. And that could burst bond investors’ bubbles.
But that’s not so for emerging markets debt. Post-2008, investors have been turning away from shaky U.S. and European debt markets and turning to developing countries as they hunt for better yields and returns. What they’re beginning to realize is that a big part of the emerging markets bond story is currency. Local currencies in some emerging markets countries have been appreciating dramatically against the U.S. dollar, creating big returns for investors. Buy the same bonds in U.S. dollars, however, and those currency returns are washed away.
Investor interest in local currency debt can be seen most dramatically in the exchange-traded fund (ETF) space. For example, last week ETF provider Van Eck Associates announced its Market Vectors Emerging Markets Local Currency Bond ETF (EMLC), launched in July of 2010, had surpassed the $1 billion mark in assets under management.
The ETF provides exposure to the JP Morgan Government Bond Index Emerging Markets Core Index which tracks bonds issues in local currencies by emerging market countries like Brazil, Chile, Colombia, Hungary and Thailand.
Other local currency bond ETFs have similar stories to tell–Wisdom Tree has drawn $1.39 billion in assets since launching its WisdomTree Emerging Markets Local Debt Fund (ELD) in August of 2010. And the iShares Emerging Markets Local Currency Bond Fund (LEMB), launched in October of 2011, is reporting an inflow of $155 million in the past month alone for total assets under management of $364.79 million.
These ETFs show how quickly the local currency emerging markets debt trend is taking hold as return hungry bond investors look for additional yields and that important return bump from currency appreciation. Going local is a good way to tap the emerging markets growth story, and these ETFs are another way to get access.