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Why Emerging Market Bonds Are the Right Risk


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Emerging Market Bonds

Emerging Market Bonds: Another Way to Invest in Growth

There is more than one way to invest in emerging markets. Many investors focus on the businesses that operate in developing countries. However, the most profitable emerging economies are sustained by governments that are borrowing in order to build more infrastructure. The emerging market bonds that are generated by these efforts can be very lucrative investments. This is especially true now that many developed countries may be looking at possible bond defaults in the future.

Why Invest in Bonds from Emerging Markets?

Just looking at these markets in general, you can come up with at least three good reasons to invest in their bonds.

• Bonds from emerging markets typically trade with higher yields. This is attractive right now when bond yields are so low in developed nations such as the US. Even though many of these nations have considerably reduced their repayment risks in the eyes of global creditors, by improving their balance sheets, the yields remain high. This juncture in history may be a rare opportunity to secure such high coupon rates while exposing portfolios to comparatively minor risks.

• You can get higher returns out of bonds that are denominated in local currency if those currencies outperform the dollar, even for a short period of time. Currency appreciation generates about 17% of return on these bonds. If inflation of the US dollar continues, you can expect these returns to increase even more.

• While emerging markets generate excitement with the risk and associated potential for earnings, their bonds generally present less risk while still benefiting from heightened interest.

The Best Bonds in Emerging Markets

• iShares MSCI Emerging Markets

• iShares JPMorgan USD Emerging Markets Bond

• PowerShares Emerging Sovereign Debt

These are just three out of several dozen funds concentrated in the emerging markets. The total number of options increases every day.

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