Fixed-income investors are selling riskier emerging market bond exchange traded funds as improving economic conditions fuel speculation of an interest rate hike.
U.S.-dollar-denominated emerging market bond funds are faltering. Over the past month, iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB) fell 2.4% and Vanguard Emerging Markets Government Bond ETF (NasdaqGM: VWOB) dipped 2.0%. Both funds have experienced seven consecutive days of selling pressure and are now trading below their 200-day simple moving average.
Additionally, the iShares Emerging Markets Local Currency Bond ETF (NYSEArca: LEMB) declined 3.5% over the past month while Market Vectors Emerging Markets Local Currency Bond ETF (NYSEArca: EMLC) decreased 4.5%. LEMB and EMLC both track local currency-denominated bonds, so the ETFs are exposed to currency risks.
With the U.S. employment market improving and signs of strength in the U.S. economy, investors are dumping emerging market debt the the largest monthly sell-off since the so-called taper tantrum, anticipating that the Federal Reserve could hike rates before the end of the year, reports Elaine Moore for the Financial Times.
According to the Institute of International Finance, investors have removed $4.4 billion from debt issued by countries in Africa, Latin America, eastern Europe and Asia over the past month.
Looking ahead, the World Bank warned that changes in the Fed’s monetary policies could cut capital flows to emerging markets by as much as 80%, which could create a crisis in certain countries. Last week, the International Monetary Fund cautioned that a U.S. rate hike would have consequences on the rest of the world.
“Since the ‘taper tantrum’ we have seen relative stability in emerging markets, but there is an idea we will eventually move away from zero interest rates and things are changing,” Paul McNamara, a fund manager at GAM, said in the FT article. “The part of the EM market to really worry about is corporate debt. There has been a tidal wave of issuance and a lot of investors have rushed in without necessarily knowing about the idiosyncrasies of the market.”