Why emerging market bonds have seen inflows in 2014

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Is it too late to allocate to this asset class? Not for long-term investors, says Russ – and he offers 3 reasons why.

Emerging market bonds have been one beneficiary of today’s low yield environment.

As investors casted a wider net for income, flows into emerging market bond exchange traded products (or ETPs) doubled from 2011 to about $6 bn last year. Meanwhile, yields on local currency bonds issued by emerging market governments are now at 5.9%, down from 6.8% March 2012.

But now, after emerging market bonds’ rally, is it too late to allocate to this asset class? In my new Market Perspectives piece, I share three reasons why I believe emerging market debt is still worth considering:

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1. EM debt adoption.

While most investors have embraced emerging market equities, they have been slower to adopt emerging market bonds, meaning the market isn’t yet overcrowded. Among institutional investors, ownership of emerging market debt is still extremely low. The largest defined benefit plans, for instance, have allocations to international debt in general of around 2%, and among retail investors, current allocations to emerging market debt are negligible. In addition, last year’s flows into emerging market bond ETPs made up just a small amount of the roughly $57bn total flows into fixed income ETPs.

Market Realist – Emerging market bond inflows have increased

The graph above shows fund flows for the iShares JPMorgan Emerging Market Bond ETF (EMB) for the past 12 months. The net inflow into this fund for 2014 so far is close to $1.5 billion. However, the ownership of emerging market debt by  institutional investors remains low, unlike emerging market stocks (EEM)(VWO). Also, emerging market bonds tend to be less liquid than US bonds (BND)(AGG).

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