By Eric Fein
Portfolio Manager, Fixed Income Emerging Markets
We believe recessionary risks are mounting, with a European recession, oil embargo risks and China’s zero-Covid uncertainties contributing to US Federal Reserve (Fed) rate hike headwinds. Fed action could bring stability to long-dated US Treasuries. However, risks to growth may not be fully priced into the market, which complicates matters and prompts us to consider extending low-beta spread duration and reducing some EM foreign currencies.
The central banks of the emerging countries have anticipated rate hikes by the Fed. They’re usually more aggressive, but in this latest installment, they’re also more preemptive. They entered the Russia/Ukraine crisis having already tightened monetary policy. However, risks to growth abound, including China’s policy stimulus that could trump economic stimulus, contributing to risks of a slowdown.
The Emerging Markets Bond Fund (the “Fund”) outperformed its benchmark in April, primarily due to the Fund not holding any Russian securities and secondly to the Fund’s very low duration. For detailed information on fund performance and the prospects for emerging market debt, go to Download comment.
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Originally published by VanEck on May 23, 2022.
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Duration measures a bond’s sensitivity to changes in interest rates, reflecting how a bond’s price changes when the yield changes. This duration measure is appropriate for bonds with embedded options. Quantitative easing by a central bank increases the money supply by conducting open market operations to encourage increased lending and liquidity. Monetary easing is an economic tool used by a central bank to lower interest rates and increase the money supply to stimulate economic activity. Correlation is a statistical measure of how two variables move in relation to each other. Liquidity illusion refers to the effect that an independent variable might have on a security’s liquidity as that variable fluctuates over time. A holdout problem in the fixed income asset class occurs when a bond issuer country or company defaults or is about to default and makes an exchange offer to try to restructure its debt held by existing bond investors. Carry is the benefit or cost of owning an asset.
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