Emerging versus developed market bonds: Which should you choose?

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Nov. 26 2014, Updated 12:00 p.m. ET

3. EM vs DM yields.

EM debt generally now offers higher yields than developed market bonds. And while emerging market debt yields have dropped in recent years, the size of the drop has been much less precipitous than that of developed market yields. In addition, emerging market bond spreads are still wide relative to US Treasuries. This means there’s further room for spread compression as emerging market asset quality and fiscal credibility continue to improve.

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Market Realist – Emerging market bond ETFs versus Treasuries

The graph above compares yields for emerging versus developed market bonds using ten-year US Treasuries (IEF), BofA Merrill Lynch AAA-A Emerging Markets Corporate bonds, and the BofA Merrill Lynch B and Lower Emerging Markets Corporate bonds. Emerging market bonds (EMB) that have a rating between AAA and A surprisingly yield only a little more than Treasuries. However, those rated B and below are yielding 10.5% on average.

As emerging markets (EEM)(VWO) recover, so will their credit markets, which will bring down their bond yields. Also, as corporate incomes improve along with the economy, the possibility of emerging market bond issuers defaulting, reduces. This will bring down credit spreads, which is the difference between yields of US Treasuries (TLT) and corporate bonds, as the latter carry a risk of default.

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