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Emerging-Market Bond Funds Bet on Rebound

NEW YORK (TheStreet) -- With markets sinking in Asia and Latin America, investors have been dumping emerging-market bonds.

During the past year, emerging-market bond mutual funds lost 9.3%, according to Morningstar. In the fourth quarter of 2013, unhappy shareholders withdrew $4 billion from the funds, a sizable outflow for a category that has $69 billion in assets.

At a time when some economies are slowing, the emerging markets face clear headwinds. But there are good reasons to think that the bond funds can deliver single-digit returns this year. Many countries still have solid balance sheets. And after the recent downturn, plenty of bonds sell at bargain prices and offer compelling yields.

"There is tremendous value in some emerging-markets bonds vs. what you can get in the U.S.," says David Robbins, portfolio manager of TCW Emerging Markets Income (TGEIX).

Robbins says that yields are 4.5% on U.S. corporate bonds that are rated double-B, the highest level in the below-investment grade universe. In contrast, some investment-grade corporate bonds in Brazil yield 6.4% or more.

As recently as a year ago, emerging-market bonds were recording steady gains. At a time when developed markets struggled with sluggish economies and huge debt burdens, many countries in Latin America and Asia recorded solid growth.

Then last May, Federal Reserve Chairman Ben Bernanke mentioned the idea of tapering the central bank's bond purchases. In response, most bonds sank. Losses were particularly severe for emerging markets. Investors worried that interest rates in the U.S. would rise, making yields in emerging markets less competitive.

Since then, other problems have plagued emerging markets. Reports suggested that growth in China was slowing. That signaled trouble for Chile and other countries that rely on exports to Asia. In countries such Turkey and Venezuela, government policies appeared to be weakening balance sheets. With investors pulling cash out of Latin America and Asia, emerging-market currencies slipped against the dollar. When foreign currencies fall, overseas bonds can lose their value for U.S. investors.

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