Despite initial skepticism, emerging-market bonds are predicted to outperform high-flying AI stocks for the rest of 2024 after the first Fed rate cut. When rates drop, the US dollar weakens, which is beneficial for emerging-market bonds. This is because foreign countries and companies often borrow in US dollars but need to service the debt in their own currency, making it harder when the dollar is strong. As the dollar is expected to weaken, now is a good time to consider investing in emerging-market bonds.
The Fed is expected to implement three rate cuts over the remainder of the year, which will further benefit emerging-market bonds. This presents a unique opportunity to take advantage of the market conditions before the rate cuts go into effect. By investing in overseas bonds, investors can potentially see high yields and dividends. Two closed-end funds (CEFs) are recommended for investing in emerging-market bonds: Western Asset Emerging Markets Debt Fund (EMD) and AllianceBernstein Global High Income Fund (AWF). Both funds offer dividends of over 7.5% and hold significant discounts to net asset value.
EMD holds a diversified portfolio of emerging-market debt, with a focus on US dollar-denominated bonds to reduce currency risk. While it has delivered decent returns since inception, there are concerns about its higher volatility and leverage. AWF, on the other hand, has outperformed EMD in terms of total return and has a longer track record of success. The fund invests in a variety of bonds, including US Treasuries and South African bonds, and does not use leverage. With a more stable performance history and a lower beta, AWF presents a potentially stronger investment option in the emerging-market bond sector.
Both EMD and AWF offer opportunities for investors to capitalize on the potential growth of emerging-market bonds in the current economic climate. With the expected rate cuts and weakening of the US dollar, emerging-market bonds are poised to perform well in the coming months. By choosing the right CEFs that provide high dividends and discounts to NAV, investors can maximize their returns in the emerging-market bond market. It is essential to consider the risks and benefits of each fund before making investment decisions in this sector.
Investors can take advantage of the opportunity presented by the current market conditions by considering investments in emerging-market bonds through CEFs. By diversifying their portfolios with these high-yielding assets, investors can potentially generate significant returns and monthly dividends. With the likelihood of rate cuts and a weakening US dollar, now is an opportune time to explore the potential growth in the emerging-market bond sector. By carefully evaluating the available investment options, investors can make informed decisions to maximize their returns in this evolving market environment.
