Emerging-markets bond funds are sexy these days -- albeit less attractive than their equity counterparts -- but investors should curb their enthusiasm and keep a cool head in the rapidly heated emerging markets.

Emerging markets bond funds' assets have roughly doubled over the past 12 months to $28 billion, thanks in part to the group's 19 percent one-year return, according to Kevin McDevitt, in today's Morningstar Fund Spy column.

To be sure, emerging-market bond funds are the best-performing fixed-income category over the trailing five, 10, and 15 years, surpassing only the Latin America stock and equity energy categories over the past 15 years, according to McDevitt. He points to PIMCO Developing Local Markets, PIMCO Emerging Local Bond, and T. Rowe Price Emerging Markets Bond as possible alternatives for investors.

However, McDevitt cautions investors to "keep their short-term return expectations in check" because of considerable tightening of credit spreads, which peaked at about 1,400 basis points in 1998 after the Russian default, but today they are closer to 350 basis points. 

Edited by: Hung Tran


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