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Thursday, May 6, 2010

Emerging Markets Bonds....The Money Flows In : An Accident Ready to Happen

The Wsj has an article today

Emerging Markets' Low Yields Still Find Fans

Debt Interest Rates Plumb the Depths As Investors Flock

About the continued rush of investors into emerging markets bonds with the consequence that the countries in this category are able to borrow at rates that are extremely attractive for the issuers. For the investors not so much.

Some current yields on 10 year bonds mentioned in the article
Mexico and Turkey: 5.125%
Egypt 5.75%

10 yr US treasuries are at 3.55, Australia at 5.66

The highest on the list is Lithuania which is in the midst of Greeklike austerity measures: 7%

The emerging markets etf (EMB) yields 4.94%

I can't see how these investments offer poor relative returns to other bonds I dont like to use the word bubble but the word comes to mind.

The risk return on the emerging markets play: a small pickup in yield based on a bet that even with the crisis in europe emerging market economies will hold up well. From the article

Ripples from the European markets have spread this week, sending prices on emerging-market bonds lower. But many investors think the selloff will be short-lived unless the European situation grows much worse.
In the past, emerging markets have suffered worse than developed markets during financial crises. But that dynamic is changing, says Keith Gardner, head of the emerging-markets group at Western Asset Management in Pasadena, Calif. Emerging-market debt "is not immune to a global crisis," he says. However, thanks to their stronger fundamental outlooks, "they should perform much better than historically has been the case."

Yet the warning signs that this may not turn out to be the case are certainly around...even on the next page in the WSJ:

Another Reason for Trouble in Asia 

HONG KONG—Jitters over Europe's growing debt problems are adding to Asia's stock-market malaise, as investors wonder whether the region's surprisingly strong recovery has peaked already....

The contagion of Greece's problems to elsewhere in Europe could crimp trade with Asia. The weak euro already is making Asian goods more expensive in Europe. The euro has fallen 13% against the South Korean won this year, 11% against the Singapore dollar and 9.6% against the Chinese yuan, which tracks the U.S. dollar. Hong Kong and Singapore, both trading hubs, count euro-area exports as 13.2% and 11% of gross domestic product, respectively, according to Nomura economists. China's euro-area exports total 3.6% of GDP.
For now, a bigger concern is that Asia's future growth will slow as policy makers tighten the monetary screws. China has made several moves to cool its housing market. It restricted bank activity for the third time this year on Sunday by raising the percentage of deposits banks must hold against their loans.
At the same time, some early signs are showing that the recovery in Asia is beginning to pull back from its roaring postcrisis bounce over the past two quarters

Here are some alternatives in US $ etfs and their yields(all have durations considerably shorter than 10 years thus less interest rate risk):

High Yield: (JNK) 9.14
Inter Term Corporate (vcit) 4.62
Intermediate Term Govt (vgit) 2.52

A portfolio spllit equally among the 3 etfs above would carry a yield of  5.43. I certainly would rather hold that then the EMB.

I am of the view that one day moves may not be indicative of long term trends but on a day like today (May 6) the relative movements of securities is a good indication of correlations in crises and of relative riskiness.

So today's price movements may be instructive:

emb -4.51%
vcit +.27%
jnk -2.68%
vgit  +1.31%

and the "black swan" trades

vxz   +4.84%

1 comment:

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