Must-read: Use emerging market bonds for higher yield potential

Market Realist

Labor Day barbecues, beaches, and bonds: Why it's all about balance (Part 4 of 4)

(Continued from Part 3)

Emerging Market Spicy Kebabs

For those who want a little more adventure on their menu, there’s always the option of adding some unique flavors like spicy kebabs. This is the equivalent of adding some emerging markets fixed income to your bond portfolio. You may run the risk of a little heartburn, with occasional volatility and currency risk, but no cookout is truly complete without a little spice thrown into the mix. It helps you balance out the blandness of some of the healthier options, and gives the overall meal a nice flavor kick.  And here, flavor means yield potential.

So what is on my plate?  I have always been a mixed grill guy.  Load up on the healthier staples like chicken and steak, throw in a couple ribs and kebabs to heighten the flavor.  Create a diversified plate and you will be on your way to a balanced source of income and a happy meal.

Market Realist – The graph above shows the month-to-date, year-to-date, and 12-month returns from various fixed income products. Emerging market bonds (EMB) have given returns of 8.2% year-to-date. U.S. Treasuries (TLT) have given 3.6% year-to-date, the Barclays U.S. Aggregate Bonds Index (AGG)(BND) has given 4.8%, municipal bonds (MUB) have given 7.5%, and high yield corporate bonds (JNK) have given 5.7%.

EM bonds have rewarded investors despite the negative headlines this year. The news of Argentina’s debt default didn’t rattle the segment. Even Argentine bonds haven’t unravelled, giving returns of almost 8% this year.

But you need to be careful, as rising geopolitical risks, which have left the segment untouched so far, may exert downward pressure on emerging market bonds. Also, emerging market bonds responded negatively to news of a taper in the U.S. bond buying program last year. As the Federal Reserve aims to complete its taper by October and raise rates early next year, emerging market bonds might be affected.

Read our series  Is now the right time for emerging market bonds? to understand the prospects of the fixed income market segment.

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