Emerging markets are up; no, they're down. It depends where you look. On the fixed-income side, it's the best of times for funds investing in emerging markets. But emerging-markets funds that stick to stocks are having a tough year.

This split, often seen country by country and not just on a broader level, defies the norm. Much of the divergence can be attributed to the economic strengthening of the developing nations that are issuing debt coupled with the recent

Nasdaq

-inspired weakness in the stock markets of many emerging nations.

Year to date, emerging markets stock funds are down 13.8%, while emerging bond funds are having a great year, up 10.7%.

"Normally, they are closer," says Mike Conelius, lead manager on the

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T. Rowe Price Emerging Markets Bond fund. "They tend to deviate when times are really, really good, which is sort of why this is confusing."

Good economic times usually bring on stock rallies in emerging markets. But the Nasdaq Composite's weakness in the second quarter took the wind out of many of the developing countries' equity markets that had relied on technology and telecommunications for leadership. At the same time, countries like Brazil, Mexico and Russia have gotten upgrades in their debt. "Russia has helped us a lot," says Conelius.

A rally in U.S. Treasuries, spurred by a prevailing sentiment that the

Federal Reserve is done raising interest rates for the foreseeable future, has helped the U.S. dollar-denominated bonds from emerging markets. Barring another slide in the tech-heavy Nasdaq, bond prices should stay where they are or even rise, portfolio managers say.

Russia has played a big role for emerging markets bond funds. It represents about 13% of

J.P. Morgan Emerging Market Bond

index, but only a small portion of the prevailing stock indices. Soaring oil prices worldwide have brought enormous surpluses into Russia, one of the world's biggest producers. Its bonds yield about 15% to 16%, a far cry from 30% yields of less than two years ago after the country had effectively defaulted on its bond obligations and brought about a global financial crisis.

There has been good news from Mexico and Brazil as well. Mexico's economic expansion after its own financial crisis of 1994 has pushed it closer to being considered a developed country, and Brazil has continued its fiscal discipline after its currency devaluation of 1998.

"The inputs into the

benchmark emerging-market bond and stock indexes are different," says Paul Dickson, portfolio manager of the

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J.P. Morgan Emerging Markets Debt fund. "The bond market is much more Latin focused, than Asia focused." Mexico, Brazil, Argentina and Russia all make double-digit contributions to the J.P. Morgan Emerging Market Bond index, but relatively small contributions to the stock indices. Year to date through Aug. 8, the

Morgan Stanley Emerging Markets

index is down 11.4%.

While Russia, Mexico and Brazil have great stories to tell when it comes to their bonds, only Russia's stock market, up nearly 14% this year, has seen the same type of gains as its bonds. Mexico's stocks are in the red and Brazil's are up just 1.5%, according to Morgan Stanley's country indices.

Emerging market bond funds have kept aloft by concentrating on sovereign debt offerings, which are bonds issued by the countries themselves. There are relatively few corporations issuing bonds.

What keeps companies in emerging markets away from the debt markets? "The hurdle rate," explains Dickson. "Corporates in emerging markets typically have to issue bonds at spreads that are wider than the sovereign. Given these relatively high yields, corporates would have a very hard time justifying yields at these levels." Translation: It costs companies too much to borrow money compared with how much it costs countries.

A Russian company might have to fork over yields in the high teens, which would be a crippling amount for most companies. In those cases, it's less of a financial burden to issue equity instead.

As with most run-ups, some investors are worried that they might be getting in too late; in this case, they have good reason to be. Some experts say the moment has passed for most of the gains.

"There's not much more the bonds can do," says Conelius. "I don't think they can repeat their performance of the first half of the year or the latter half of last year."

Some investors are sticking to stocks for their emerging-markets exposure. "If you want growth, then go for equity," says Scott Wells, international portfolio manager with Coral Gables, Fla.-based planning firm

Evensky, Brown & Katz

.