Due to weakening currencies and rising current account deficits in some emerging Asian nations along with fears of Federal Reserve tapering, investors have pulled billions of dollars from funds with heavy exposure to Asian debt.
In what may be a sign of some good news for select exchange traded funds, those outflows appear to be slowing. Outflows from “emerging Asia bonds peaked in July and have since eased somewhat, although $319 million exited in the week ending November 27, up from a $263 million outflow in the previous week, CNBC reported, citing ANZ Bank.
HSBC sees the higher yields on emerging Asian debt providing a yield spread cushion against rising U.S. Treasury yields, according to CNBC. The bank expects the total return offered by the region’s bonds to improve next year.
Although 10-year Treasury yields still hover around 2.8%, that is not even half the 5.7% 30-day SEC yield on the Market Vectors Emerging Markets Local Currency Bond ETF (NYSEArca: EMLC). Cash has flowed out of EMLC since the start of the November, but the ETF, which allocates 22.2% of its weight to emerging Asian nations, has risen 2.5% in the past 90 days. [Punishment Could be a Gift for EM Bond ETFs]
Delays in Fed tapering, improving current account situations and increased animal spirits among global bond investors could be positive catalysts for the local currency-denominated EMLC in 2014. EMLC has an effective duration of 4.55 years with a yield-to-worst of 6.08%, according to Market Vectors.
A more conservative option with which to play a potential rebound in Asian bonds is the WisdomTree Asia Local Debt Fund (NYSEArca: ALD). Like EMLC, ALD is denominated in local currencies, but the fund is useful for risk-averse investors.