In 2024, a wild prediction suggests that emerging-market bonds will outperform high-flying AI stocks following a Federal Reserve rate cut. The drop in interest rates typically weakens the US dollar, benefiting emerging-market bonds. As the dollar has been strong for the past decade, a decline could happen quickly, making it an ideal time to invest in EM bonds. When the dollar is strong, EM bonds suffer as countries and companies struggle to service debt in their own currencies, but a weaker dollar presents an opportunity for investors.
Despite ongoing speculation about rate cuts being pushed back, the Fed is expected to make three cuts this year, driven by decreasing inflation and market expectations. This provides a favorable environment for investing in overseas bonds, including emerging-market bonds. Regardless of how the next few months unfold, investors can benefit from this opportunity. There are two closed-end funds (CEFs) that offer dividends above 7.5% and trading at discounts to net asset value, providing a way to access this opportunity.
The Western Asset Emerging Markets Debt Fund (EMD) is a diversified fund with 239 holdings, predominantly in US-dollar-denominated bonds. While it offers a high yield of 10.9% and a significant discount, it also has high volatility and leverage. On the other hand, the AllianceBernstein Global High Income Fund (AWF) yields 7.5% and trades at a smaller discount, focusing on a mix of investments including US Treasuries and mortgage-backed securities. AWF has outperformed EMD in terms of total return since its inception and offers a more stable investment option.
AWF’s management, with deep connections in the bond world, has led to its strong performance over the years. The fund does not use leverage and has a lower five-year beta compared to EMD, making it a more stable investment in the current market environment. Despite a smaller discount compared to EMD, AWF’s markdown has narrowed in previous years during periods of low interest rates, indicating potential upside. Overall, AWF presents a strong investment opportunity for those looking to capitalize on the potential of emerging-market bonds amid changing market conditions.
Investors can benefit from these opportunities in EM bonds, driven by expectations of Federal Reserve rate cuts and a weakening US dollar. By considering closed-end funds like EMD and AWF, investors can access high dividends and discounts to net asset value. With the potential for further rate cuts and market volatility, investing in EM bonds presents an attractive option for generating income and diversifying a portfolio. As the market continues to evolve, it’s important to consider these opportunities and take advantage of the potential benefits they offer in a changing economic landscape.
