Why investors should consider emerging markets bonds in 2024 (2024)

Expert insight

February 22, 2024

Why investors should consider emerging markets bonds in 2024 (1)

Daniel Shaykevich

Principal, Senior Portfolio Manager, Manager Emerging Markets

Vanguard’s active fixed income team believes emerging markets (EM) bonds could outperform much of the rest of the fixed income market in 2024 because of the likelihood of declining global interest rates, the current yield premium over U.S. investment-grade bonds, and a longer duration profile than U.S. high yield.

Key highlights

  • The current environment is supportive of fixed income assets, in general, and EM bonds, in particular.
  • Owing to their unique return profile, EM bonds should stand to benefit if the Federal Reserve and other central banks cut interest rates, as expected.
  • Valuations on EM bonds look attractive relative to U.S. investment-grade and high-yield bonds. New issuance in January helped improve valuations.

Why it matters

Investors typically need to proactively allocate to EM bonds, since they are often a small part of core or core-plus strategies and typically not included in model portfolios.

Strong returns in 2023

EM bonds, as measured by the JPMorgan EMBI Global Diversified Index, returned 11.1% last year. A key driver of strong EM credit returns in 2023 was a supportive demand-and-supply dynamic. Investment-grade (IG) issuers outperformed their fiscal budgets in 2023, limiting their need to issue debt. High-yield (HY) issuers faced prohibitively high funding costs composed of high Treasury yields plus wide spreads and turned instead to official creditors for funding.

As EM IG spreads tightened due to the lack of supply throughout 2023, we used the opportunity to rotate out of EM IG and into EM HY issuers, where our team identified compelling valuations coupled with improving fundamentals. Additionally, we sought exposure in EM local currency bonds, capitalizing on falling inflation and high real yields in EM economies. In our multi-sector funds, we substituted out EM IG for U.S. credit where valuations were more attractive.

Expecting another strong year in 2024

Coming into this year, we were defensively positioned in EM IG, expecting more normal totals of debt supply to push spreads wider. Following large front-loaded new issue supply, EM IG spreads are now at attractive levels versus U.S. credit, setting up EM debt for outperformance. Our 2024 macroeconomic base case features slowing inflation and growth cushioned by Fed rate cuts. This environment is supportive of fixed income assets, in general, and credit assets, in particular.

In addition to attractive valuations, the EM asset class benefits from a unique combination of wide spreads and long duration, something that neither U.S. IG nor U.S. HY can offer. This leaves EM debt uniquely poised to benefit from a rally in rates as central banks cut, and from supportive risk appetite as growth normalizes. With historically expensive valuations in U.S. corporate bonds and strong investor demand for fixed income assets, EM debt stands to benefit. Increasing demand is likely to overwhelm supply in the coming months, helping drive outperformance in EM debt.

EM bonds offer compelling valuations

Why investors should consider emerging markets bonds in 2024 (2)

Note: Emerging markets credit represented by JPMorgan EMBI Global Diversified Index, U.S. investment grade represented by Bloomberg U.S. Corporate Bond Index, and U.S. high yield represented by Bloomberg Corporate High Yield Index.

Sources: Bloomberg and JPMorgan, as of January 30, 2024.

EM IG and HY spreads are near their most attractive levels versus U.S. credit in two years

Sources: Bloomberg and JPMorgan, as of January 30, 2024.

EM IG issuance is particularly front-loaded in 2024 with 47% of expected issuance completed

Why investors should consider emerging markets bonds in 2024 (4)

Note: Full-year 2024 emerging markets investment-grade issuance is a forecast.

Source: Bloomberg, as of January 30, 2024.

How to access

Three Vanguard products offer significant exposure to emerging markets bonds:


Vanguard Emerging Markets Bond Fund (VEGBX)

Vanguard Multi-Sector Income Bond Fund (VMSAX)


Vanguard Emerging Markets Government Bond ETF (VWOB)

Related links:
  • Active fixed income and our ownership structure (article, issued February 2024)
  • Vanguard active fixed income perspectives Q1 2024: Yield mountain(article, issued February 2024)


For more information about Vanguard funds or Vanguard ETFs, visit advisors.vanguard.com or call 800-997-2798 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Past performance is no guarantee of future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. All investing is subject to risk, including possible loss of principal. Diversification does not ensure a profit or protect against a loss.

Bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline.

Investments in bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.

Bonds of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets.

High-yield bonds generally have medium- and lower-range credit-quality ratings and are therefore subject to a higher level of credit risk than bonds with higher credit-quality ratings.

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Why investors should consider emerging markets bonds in 2024 (5)

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Why investors should consider emerging markets bonds in 2024 (2024)


Why investors should consider emerging markets bonds in 2024? ›

Among the opportunities in the fixed income markets in 2024, local-currency EM bonds may be one to consider for investors with a higher risk tolerance. The relatively high yields and likelihood of rate cuts by global central banks have created a tactical investment opportunity.

Why invest in emerging markets in 2024? ›

Vanguard's active fixed income team believes emerging markets (EM) bonds could outperform much of the rest of the fixed income market in 2024 because of the likelihood of declining global interest rates, the current yield premium over U.S. investment-grade bonds, and a longer duration profile than U.S. high yield.

Should I invest in bonds 2024? ›

As inflation finally seems to be coming under control, and growth is slowing as the global economy feels the full impact of higher interest rates, 2024 could be a compelling year for bonds.

Why is it good to invest in emerging markets? ›

An emerging market has the potential for strong economic growth. It is more established than a frontier market, which is usually deemed too small or risky but less than a developed one. They can be attractive to investors due to their rapid growth prospects, but they can be volatile and, therefore, risky.

How will emerging markets do in 2024? ›

A third consecutive monthly acceleration in global output growth was supported by faster emerging market expansion while developed markets also returned to growth for the first time in six months.

What is the economic outlook for emerging markets in 2024? ›

Consensus earnings growth5 for EM in 2024 and 2025 is nearly 19% and 15%, respectively, compared to less than 11% and 13% in the United States.

Is a good time to invest in bonds? ›

Short-term bond yields are high currently, but with the Federal Reserve poised to cut interest rates investors may want to consider longer-term bonds or bond funds. High-quality bond investments remain attractive.

Should you buy bonds in a recession? ›

In a recession, investors often turn to bonds, particularly government bonds, as safer investments. The shift from stocks to bonds can increase bond prices, reduce portfolio volatility, and provide a predictable income. However, drawbacks include lower yield potential, default risks, and interest rate risks.

What is the best way to invest in emerging markets? ›

Investing in individual emerging markets stocks is difficult for the average investor, so mutual funds and ETFs are often the most effective way to do it. Look for funds with high assets under management.

Why emerging markets are better than developed markets? ›

Developed markets provide stability and efficiency, while emerging markets offer high growth potential but with increased risks and volatility. The key for investors is to align their portfolios with their risk tolerance and investment goals, leveraging the strengths of both market types.

What are three reasons why investors should consider adding bonds to their portfolios? ›

Investors include bonds in their investment portfolios for a range of reasons including income generation, capital preservation, capital appreciation and as a hedge against economic slowdown.

Why do investors prefer to invest in bonds? ›

Investors buy bonds because: They provide a predictable income stream. Typically, bonds pay interest on a regular schedule, such as every six months.

What is the safest bond to invest in? ›

Treasuries are generally considered"risk-free" since the federal government guarantees them and has never (yet) defaulted. These government bonds are often best for investors seeking a safe haven for their money, particularly during volatile market periods. They offer high liquidity due to an active secondary market.

Will emerging markets outperform in 2024? ›

We expect growth in EMs will diverge significantly in 2024, moderating for many countries that outperformed in 2023 and slightly increasing for some countries that underperformed.

Will the market be better in 2024? ›

1. Positive returns -- but smaller than in 2023. I think that the overall stock market will deliver positive returns in 2024. However, I expect those returns to be somewhat smaller than they were last year.

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