With the Federal Reserve’s decision to begin its “tapering”, the initial steps of this process could likely cause some bond buyers to dial back their risk profiles, according to Fran Rodilosso, fixed income portfolio manager with Market Vectors ETFs.

Fran Rodilosso, fixed income portfolio manager at Market Vectors ETFs.

“The likelihood of continued Fed tapering in 2014 implies a shift in the supply/demand equation for spread funds next year,” said Rodilosso. “When you ultimately remove what was until last week $85 billion per month of demand for higher quality bonds, at least at the margin, some buyers are going to come back down the risk curve.”

“Earlier this year, some fixed income asset classes, including emerging markets (EM) local currency sovereign, and EM hard currency corporate and sovereign bonds, reacted violently to the prospect of tapering and therefore are ending the year having underperformed their developed market counterparts,” Rodilosso continued.

“However, looking forward to 2014, I would highlight that EM bonds represent one area of fixed income where pockets of value still may remain. Local markets that were beaten up over the summer may not have fully recovered. At the same time, corporate credit spreads have moved meaningfully wider versus their US counterparts.”

Rodilosso is manager of the Market Vectors EM Aggregate Bond ETF (EMAG), an NYSE Arca-listed fund offering a diversified, all-in-one approach to investing in EM bonds, in a liquid, transparent exchange-traded fund format.

This fund is linked to the Market Vectors EM Aggregate Bond Index, an index tracking the performance of the EM bond universe, covering local currency and hard currency sovereign and corporate bonds. The index was designed to play a role in helping to benchmark manager performance versus the broad opportunity set of EM bonds.

Rodilosso has 20 years of experience trading and managing risk in fixed income investment strategies, including 17 years covering emerging markets. In addition to the EM aggregate bond ETF, he oversees a number of other Market Vectors ETFs, which in total amount to approximately $1.4 billion in assets, as of November 30, 2013.

Market Vectors is the ETF and index brand of Van Eck Global.