Rate Cut Kickoff Sparks Rush to Emerging Market Bond ETFs

Investors poured money into exchange-traded funds that buy emerging-market bonds last week as optimism around the Federal Reserve’s easing cycle fueled risk appetite.

Three of the biggest ETFs tracking EM bonds saw cash infusions last week, according to data compiled by Bloomberg. The $16.1 billion iShares J.P. Morgan USD Emerging Markets Bond ETF received $130 million in inflows, while the VanEck J.P Morgan EM Local Currency Bond ETF and Vanguard Emerging Markets Government Bond ETF recorded $109 million and $40 million, respectively in the week ended Sept. 20.

“The rising inflows into EM bond ETFs shows that investors have started to position themselves for a supportive backdrop from Fed rate cuts,” said Nenad Dinic, an equity strategist at Bank Julius Baer in Zurich. “EM bonds have delivered more consistent returns across all economic scenarios vs EM stocks during Fed rate cuts and the returns were resilient regardless of whether the US economy experienced a soft or hard landing.”

Last week, the Federal Reserve lowered its benchmark interest rate by a half percentage point on Wednesday, spurring risk appetite globally. Projections released following their two-day meeting showed a narrow majority, 10 of 19 officials, favored lowering rates by at least an additional half-point over their two remaining 2024 meetings.

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Among investors, the expectation is that with lower US rates, more money will flow into developing-nation debt, which offers higher returns to investors. An index of local-currency emerging market bonds is poised for its best third quarter since 2010.