How Much Emerging-Market Bonds Have Outpaced U.S. Bonds Since March 2009: 3X
The Barclays emerging-markets bond index -- made up largely of government-issued debt -- has returned roughly 70 percent since the market meltdown three years ago. That's nearly three times as much as the comparative Barclays U.S. bond fund. The reasons for such a wide divergence are rooted in economics: The BRIC countries ran 2011 budget deficits of about 2.5 percent of GDP, while the U.S. ran a deficit of 8 percent. Bloomberg consensus forecasts show emerging markets growing at double or triple the rate of developed markets over the next couple of years, which will only benefit them more.
Photograph by Qilai Shen/Bloomberg
Why It Matters
Emerging-market bonds are anything but a sure bet. The market collapse set off by the Lehman Brothers bankruptcy caused a 30 percent drop in emerging-market debt indexes. That wasn't as bad as the 45 percent drop in the S&P 500 Index -- and emerging-market debt recovered much more quickly. Even so, U.S. Treasuries vastly outperformed almost every other asset class at the time. What emerging-market debt does offer is the potential for even greater returns -- along with some risk.
Graphic by Charlos Gary/Bloomberg
What It Means for Your Portfolio
Bulls say this is a new era for emerging markets -- and that even if Europe continues to falter emerging-market debt prices will be sustained by superior fundamentals in their economies. Viewing emerging market bonds as a safe haven, however, may not be wise. While emerging market bonds are not necessarily vulnerable to Europe's sinking economy, they are vulnerable to general investor panic -- which could result from the market chaos in Europe. That could lead to a global sell-off of risky investments.
Photograph by Brent Lewin/Bloomberg