Some EM Bonds Trumping Developed Market Equivalents

Most bond investors know that the yields offered by U.S. Treasuries are nothing to write home about. What might come as a surprise to those that do not actively follow international markets is that the short-term Treasury yields look downright robust when compared to what some of Europe's steadier economies offer. Investors are so desperate to find European sovereigns that are perceived as safe that a recent issue of two-year German Bunds was bid higher to the point that yields turned negative. As of July 17, Austria, Denmark, Finland, the Netherlands and Switzerland also had two-year bonds with "priced with negativity yield-to-maturity metrics," according to ETF issuer WisdomTree. Germany's status as the potential savior of the Eurozone has driven yields on 10-year bunds down to the 1.5 percent area, prompting PIMCO's Bill Gross to say "Let's see: would I rather own German or Mexican 10-yr bonds? 1.5% or 5.7%? Huge potential debt/GDP or half that of U.S.? Duh." Gross, PIMCO's co-CIO notes that even though Mexico's credit rating is far below that of Germany's "we see greater opportunity in Mexican bonds than German bonds for some investors." The comments were posted on PIMCO's Twitter feed and attributed to Gross. With better economic growth, sturdier balance sheets and the potential for higher credit ratings, emerging markets (including Mexico) could prove to be viable alternatives to developed nations for bond investors. In terms of performance, some emerging markets bond funds have easily outpaced those ETFs offering exposure to developed market bond issues. Year-to-date, the dollar-denominated PowerShares Emerging Markets Sovereign Debt ETF PCY has surged 10.3 percent compared to a loss of almost two percent for the PIMCO Germany Bond Index Fund BUND. Mexico accounts for 4.5 percent of PCY's weight, making it ETF's fourth-largest country weight. WisdomTree is also a believer in Mexican sovereigns. The firm said, "our own research and investment process for the WisdomTree Emerging Markets Local Debt ETF ELD has led us to the same conclusion" regarding Mexico. The WisdomTree Emerging Markets Local Debt ETF has over $1.2 billion in assets under management, making it the second-largest actively managed ETF. ELD has a 30-day SEC yield of nearly four percent and devotes nearly 10.4 percent of its weight to Mexico. That makes Mexico the largest country weight in ELD. The Market Vectors LatAm Aggregate Bond ETF BONO, which has a 30-day SEC yield of 5.5 percent, also offers a large allocation to Mexico. Peso-denominated bond issues represent 14.3 percent of BONO's overall weight. With European sovereigns risky and Treasuries not exciting in the way of yield, investors might have reason to be optimistic about emerging markets debt. WisdomTree shares that optimism. "We're optimistic that over the next 3–5 years, debt of certain emerging market countries has the potential to provide attractive rates of return," the firm said. For more on emerging markets bond ETFs, click here.