Wrong Place, Wrong Time for This EM Bond ETF

January 27th at 8:15am by Todd Shriber

There is not much going right for emerging markets exchange traded funds right now and that sentiment is not limited to equity-based funds.

In what looks like a sequel to the plunge seen in the second quarter of 2013, emerging markets currencies and debt are tumbling on speculation that the Federal Reserve is prepared to once again taper its bond-buying program. The Fed has already lowered its easing effort to $75 billion a month from $85 billion, but recent price action in almost anything with the emerging markets label seems to be pricing in an imminent move to $65 billion per month in U.S. monetary easing.

The forecast is glum for emerging currencies and debt. JPMorgan Chase & Co. expects local-currency bonds to post 10 percent of their average returns since 2004 this year and Morgan Stanley expects the Brazilian real, Turkish lira and Russian ruble to struggle again in 2014. [No One Likes Emerging Markets]

One developing world bond ETF is looking increasingly vulnerable: The iShares Emerging Markets High Yield Bond ETF (NYSEArca: EMHY). EMHY’s 30-day SEC of almost 6.8% could be seen as attractive, but that number is likely to be higher in the coming weeks and it is easy to see why. [Tapering Talk Sends Emerging Currencies Reeling]

Last week, the Turkish lira fell to a record low against the U.S. dollar and at the end of last year, foreign investors were seen disposing of Turkish sovereign debt at the most rapid pace in two years. Turkey is EMHY’s largest country weight at 13.8%.

Also last week, the yield on Venezuelan bond’s jumped to 14.5% with the South American country’s benchmark bonds hitting two-year lows. Venezuela, which some believe has the world’s largest oil reserves, is 11.9% of EMHY’s weight.

Indonesian bonds have been strong for a decent part of 2014, but at 12% of EMHY, the country represents less than half the combined weight the ETF allocates to Turkey and Venezuela. However, “the lack of structural reform in Indonesia, the onset of parliamentary and presidential elections in April and July respectively, and its increased foreign-currency requirements stemming from a weak balance-of-payments position exacerbated by US tapering suggests Indonesian bonds will struggle this year,” according to EuroMoney.

Ukraine government bonds rest near two-month highs and the country is dealing with deadly protests, a road traversed by Turkey last year. Additionally, Hungary’s scorched-earth rate-cutting campaign along with the belief that the country is vulnerable to the loss of U.S. stimulus has adversely impacted demand for that nation’s sovereign debt.

Hungary and Ukraine combine for almost 7.6% of EMHY’s weight.

iShares Emerging Markets High Yield Bond ETF

 

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