Michael Batnick and Ben Carlson interview Eric Fine, portfolio manager for the VanEck Emerging Markets Bond Strategy (EMBX), exploring how emerging market bonds have transformed from volatile basket cases into lower-risk, higher-yielding alternatives to developed market debt.

The conversation reveals surprising data about volatility reversals, central bank reserve diversification, and fiscal discipline in emerging markets. Fine explains how countries that experienced repeated crises have developed stronger institutions and political stability, while developed markets face growing fiscal dominance risks.

Key topics include currency hedging strategies, the role of AI capex cycles, geopolitical impacts from conflicts, and why emerging market governments now maintain better fiscal positions than their developed counterparts. The discussion draws on insights from This Time Is Different regarding sovereign debt dynamics and historical crisis patterns.

The Volatility Reversal: EM Bonds Now Less Risky Than DM

"EM bond vol is now lower vol than developed market bond vol" with higher carry than Treasuries or the Agg - Eric Fine

The absence of fiscal dominance explains lower volatility, as EM central banks maintain independence without political pressure to monetize debt

"Most of the countries in our benchmark have learned the lesson" with presidents maintaining 60-80% popularity by promising budget stability - Eric

VanEck's benchmark returned 2.5% over 10 years while Treasuries and the Agg were "basically up zero" - Eric

Central Banks Quietly Building EM Reserve Positions

"A big portion of our Asian bonds are becoming reserve currencies" with central banks buying without public announcements - Eric

China, Malaysia, Singapore, and Korean bonds serve as attractive reserve assets for diversification away from Treasuries

"When you saw all those headlines of Brazil, China agreeing to trade in each other's countries, what do you think a bank is going to do with cash? Open a bond line" - Eric

Kenneth Rogoff's analysis in This Time Is Different framework applies to sanctions risk, as he "called it a default" when Russian central bank reserves were sanctioned

Currency Strategy: No Hedging, High Real Yields

"We never hedge currency risk because hedging takes away basically the entirety of the value" - Eric Fine

"Overall FX volatility in emerging markets is lower than developed market FX volatility" including yen, sterling, and euro

Strategy focuses on countries with high real yields where interest rates exceed inflation rates significantly

"The definition of a reserve asset is not that when your interest rate goes up, your currency weakens" - unlike UK and Japan - Eric

Fiscal Discipline vs Developed Market Debt Concerns

"These are the kids that grew up tough, that didn't have a trust fund and had to work hard, and now they're in good shape" - Eric on EM countries

EM countries "go to the market, they talk to people like me" to understand why spreads are higher, unlike developed markets

"In 2008, we guaranteed all derivatives, about a quadrillion notional" representing massive hidden leverage in developed markets - Eric

China "had a real estate crisis" but "let it happen" without bailouts, unlike developed market approaches

Geopolitical Events Benefit EM Bond Markets

"Ships sail in Venezuelan, we accumulate Venezuelan bonds" as geopolitical tensions actually benefit some EM markets - Eric

"Colombia's one of the best performing local currency markets" following Iran conflict and higher oil prices

"Sub-Saharan Africa is replacing Russia and now big parts of the Gulf as a supplier of commodities" creating boom conditions

"As interest rates rose, my currencies did not weaken" during global yield increases, showing EM resilience - Eric