Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Emerging Market Bonds: Where Do We Go From Here?

By Michael FabianBondsNov 16, 2014 12:04AM ET
www.investing.com/analysis/emerging-market-bonds:-where-do-we-go-from-here-232564
Emerging Market Bonds: Where Do We Go From Here?
By Michael Fabian   |  Nov 16, 2014 12:04AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

Investors that were early to identify the attractive valuations following the volatility in emerging market bonds in early 2014 are still sitting atop a pile of gains, yet in recent months new investors haven’t experienced the same steady uptrend.

Partly due to the slack in the credit markets domestically, bonds in emerging markets have largely moved sideways in a 2% range over the past few months. The seemingly endless uptrend in the US Dollar has been weighing heavily on retail interest for foreign assets, even those that are in fact already denominated in U.S. Dollars.

While it’s impossible to know just how far the dollar can climb, or how long emerging market bond volatility will persist, I believe keeping them on your radar with a plan to add during the recent consolidation could pay off in the intermediate term.

Judging by the recent price action in two of the largest U.S.-dollar-denominated emerging market bond index ETFs — the iShares Emerging Market Bond Fund (NYSE:EMB) and the Powershares EM Sovereign Debt Portfolio (NYSE:PCY) — it’s clear both funds are mired with indecision.

A Closer Look at Emerging Market Bonds

From a technical perspective, the lows established in the broad channel dating back to mid-June have not been breached on the downside, further contending that EM bonds could have firm support. However, in the near term, it appears that channel is narrowing, which can lead to break down or break out, and in turn cause a fast move as a result of some unknown catalyst.

The funds have largely worked off any intermediate overbought tendencies, as each is toggling above and below its 50-day moving average.

From a fundamental perspective, EM bonds seemingly have everything going for them, including a decently buoyant equity market, a stable interest rate environment and election cycle fatigue that has largely passed. Furthermore, EM bonds still present better value and yield when compared to corporate securities issued in the U.S. with similar credit ratings.

The biggest crux to the stellar fundamental backdrop is the fear over a potential global slowdown. Nor are EM bonds helped by the perceived tension of the U.S. Federal Reserve fully unwinding its quantitative easing program, which has been a driving force for investment in both domestic high yield and EM fixed income assets over the last several years.

However, both scenarios are pure speculation since growth rates still look healthy for many EM nations, and it’s still too early to know the long-term follow-on effects of a domestic credit market without QE.

From an observational standpoint, EMB and PCY have returned roughly 9% this year (including dividends), which puts them near the top of the heap for credit-weighted indices. However, to see the real effects the U.S Dollar has levied on local currency indexes, the iShares Local Currency EM Bond Fund (NYSE:LEMB) is essentially flat on the year. All else being equal, an 8.5% divergence from currency factors alone is significant.

How to Play Emerging Market Bonds

From a strategy perspective, aggressive investors who believe the recent run-up in the U.S. Dollar may be ending could start a position in LEMB at current price levels. That position would account for an upward bet on EM currencies and fixed income prices.

On the other hand, aggressive investors that want to sidestep the currency dynamics altogether and seek a higher yield than EMB or PCY offer could opt for the iShares Emerging Markets High Yield Bond Fund (NYSE:EMHY), with its current 30-day SEC yield of 6.5% and a mix of both corporate and sovereign issues.

Although both EMHY and LEMB have underperformed to a greater extent in recent months, a shorter-term portfolio opportunity could see an investor overweighting the two funds. That way, you further diversify existing core holdings in EMB or PCY with hopes of a rally into year-end.

Finally, conservative investors eager to add lower-risk EM exposure could opt for the newly launched DoubleLine Emerging Markets Low Duration Bond Fund (DELNX). DELNX lowers volatility by investing in primarily EM corporate issues with durations of less than 3 years, thereby reducing much of the risk that interest rate fluctuations add.

DoubleLine has a lot of experience in EM Bonds, and if you’re fretting over the DELNX’s lack of experience, look at the Luz Padilla’s other EM bond fund the DoubleLine Emerging Market Fixed Income Fund (DLENX), which currently ranks in the top 98th percentile of all EM bond funds in 2014.

No matter how you decide to play EM bonds, there are many great options to increase your portfolio’s yield and total return once the driving forces at work begin unfold.

Original post

Emerging Market Bonds: Where Do We Go From Here?
 

Related Articles

Tim Knight
Bonds And Trendlines By Tim Knight - May 28, 2021

One thing’s for sure: the two channel lines I put down for the bonds (TLT) a while ago have been doing a yeoman’s job designating support and resistance levels.

Michael Lebowitz
Taper Is Coming: Got Bonds? By Michael Lebowitz - May 26, 2021

Taper Is Coming: Got Bonds? The solid economic recovery and easing of COVID restrictions lead us to believe a tapering of QE may not be far off. Further supporting our opinion,...

ING Economic and Financial Analysis
Federal Reserve: 0% Cash Back By ING Economic and Financial Analysis - May 24, 2021

So much liquidity has been pumped into the system that chunks of it are being offered back to the Federal Reserve, at zero percent. Perverse, as players are effectively shuffling...

Emerging Market Bonds: Where Do We Go From Here?

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email