According to Nick Eisinger, co-head of emerging markets active fixed-income at the fund with headquarters in London, “in the event that a US recession takes hold, it is likely that the market will anticipate rate cuts by the Federal Reserve, resulting in a rally in core rates and, by extension, some of the higher quality Treasury sensitive names.”
According to him, investment grade sovereigns like Poland or Saudi Arabia would be robust in this scenario. He also noted that a slowdown in the world’s leading economies is more of an external risk than the fund’s base case. As of the beginning of 2022, Vanguard was managing fixed-income assets worth over $1.8 trillion globally.
According to an Intercontinental Exchange index, investment-grade emerging-market sovereign bonds, such as those issued by Poland and Saudi Arabia, have returned 5.2% in local currency since the Fed began raising interest rates in March 2022 as coupon income has outpaced capital losses. US Treasuries have down 8.2% over the time frame.
Even while Wall Street is increasingly betting that the Fed has guided the US economy towards a gentle landing, Eisinger’s comments demonstrate how investors are preparing for the possibility of a US recession. Investors on the other side of the world are still watching to see if a flurry of Chinese government initiatives to boost the economy will succeed.
According to Eisinger, the Chinese government’s efforts to boost the economy are “still quite piecemeal,” and “it seems to us, and the investor community in general, that they’re sort of just doing enough to maintain some bare degree of confidence.”
According to statistics gathered by Bloomberg, an emerging countries bond fund Eisinger helps manage outperformed 94% of its counterparts over the past year.
Anguard sees a chance to increase exposure to investment grade debt from emerging markets because he anticipates that increased supply of bonds will cause their yield gaps over Treasury bonds to expand. “That’s kind of what we’d call our rainy day exposure,” he remarked.