Short Interest Surges in EM Bond ETF
June 10th, 2013 at 7:00am by Tom Lydon
Talk that the Federal Reserve will begin winding down its $85 billion-per-month asset-buying activities later this year is not just hampering emerging markets stocks and equity-based ETFs. Developing world bond funds, both the dollar-denominated and local currency varieties, are feeling plenty of end-of-QE pain as well.
Recent price action in emerging markets bond ETFs such as the iShares J.P. Morgan USD Emerging Markets Bond Fund (NYSEArca: EMB) and the PowerShares Emerging Markets Sovereign Debt Fund (NYSEArca: PCY) represents a sharp turn in fortune from last year when investors embraced these ETFs as alternative yield plays. [Emerging Markets Bond ETFs for Yield]
Investors are not just departing emerging markets bonds, some traders are looking to profit on the downside as well. Short interest in EMB, the largest emerging markets bond ETF by assets, surged to 8.5 shares million on June 5, reports Ye Xie for Bloomberg. That is more than quadruple the short interest in the ETF at the end of last year.
EMB saw $80 million in redemptions on June 5, the biggest one-day outflow since March, according to Bloomberg. However, the June 5 outflows were not a one-off event. EMB has hemorrhaged $1.23 billion this year while PCY has lost nearly $495 million in assets, according to Index Universe data.
EMB now features a 30-day SEC yield of 3.97% as investors have dropped Turkish sovereign bonds amid scathing anti-government protests there. Yields on Brazilian sovereign debt have jumped due to slowing economic growth and rising interest rates. Those two countries combine for just over 13% of EMB’s weight. [Two Emerging Markets Bond ETFs Yielding 4%]
Both EMB and PCY are denominated in U.S. dollars which eliminates the guesswork of currency conversion, but the ETFs have not benefited from recent strength in the greenback. Year-to-date, the PowerShares DB Dollar Bullish (NYSEArca: UUP), the ETF equivalent of the U.S. Dollar Index, is up 1.6%. EMB is off 8% while PCY has tumbled 9.5%.
iShares J.P. Morgan USD Emerging Markets Bond Fund
ETF Trends editorial team contributed to this piece. Tom Lydon’s clients own shares of EMB.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.