Emerging market debt funds drop as Russia's attack ripples to different corners of financial markets

Published Fri, Feb 25 20222:38 PM ESTUpdated Fri, Feb 25 20222:39 PM EST

Russia's invasion of Ukraine is having a ripple effect on global financial markets. Many emerging markets fixed-income funds are getting hit hard this week due to their ownership of Russian debt, which has been targeted by the U.S. and Europe's sanctions. The Western Asset Emerging Markets Debt Fund (EMD) , which holds 6.6% of its allocation in Russian bonds, fell about 4% week to date. With 4.5% of its holdings in Russian debt, the VanEck EM Local Currency Debt ETF , fell nearly 2% over the same period. The iShares USD EM Debt ETF, Vanguard Emerging Markets Government Bond ETF and SPDR Bloomberg Emerging Markets Local Bond ETF also invest in Russian bonds and have suffered losses due to the escalating geopolitical tensions. The sell-off in these funds came as Russian forces closed in on Ukraine's capital Kyiv . The U.S. is set to ban the purchase of Russian government bonds as part of proposed sanctions against Moscow. The European Union has set plans to match the U.S.' sanctions. President Joe Biden said Thursday the totality of the penalties will target trillions in assets and include restrictions against Russian banks including VTB Bank and Sberbank. Morgan Stanley estimated that about $10 billion assets are benchmarked to emerging markets indices like J.P. Morgan USD Emerging Markets High Yield Bond Index that have a footprint in Russian debt. Strategists are pondering if further actions would be taken to target a wider range of Russian assets and trading in those securities. "In terms of sovereign debt sanctions, a next potential step would be to sanction secondary trading of all existing debt, while the most severe measure could include prohibition of holding Russian sovereign debt, which would trigger divestment," Morgan Stanley economist Alina Slyusarchuk said a note. Russian assets have fallen sharply this week as the Ukraine crisis intensified. Earlier this week, the Russian ruble tanked more than 10% to its lowest level ever against the dollar . Moscow's main equities index, the MOEX, cratered and notched its worst one-day drop on record Thursday. The VanEck Russia ETF , that tracks Russian companies or those who generated at least half of their revenue from the country, dropped 19% on Thursday. Though the fund traded in positive territory on Friday, it's down more than 30% for the week.