How QEII Could Affect the Bond ETF Market | ETF Trends

Quantitative easing part two could be right around the corner, and investors are already scrambling in the bond exchange traded fund (ETF) markets. It may be time to rethink what type of bonds one might want in a bond portfolio.

PIMCO‘s  Bill Gross recently likened the government’s attempt on revitalizing the job market to a Ponzi scheme based on bondholders and warned about the possibility that consumer demand may not pick up despite zero interest rates and large asset purchases, in which case borrowing or lending will continue to stagnate, writes Steve Schaefer for Forbes. [Bond ETFs Take on an Age-Old Problem.]

The Fed’s first purchase of more than $1.5 trillion in securities to stir up the economy in the wake of the financial crisis was a boon to the bonds market, but Gross warns that a second quantitative easing won’t have the same effect on the bond market since prices are already as high as they can be.

If investors want higher yields, Gross suggests looking into developing/emerging market debt in non-dollar denominations, high-quality corporate bonds or even U.S. Agency mortgage securities.

  • iShares JP Morgan USD Emerging Markets Bond Fund (NYSEArca: EMB): The top countries are Russia, Brazil, Mexico, Turkey and the Philippines; yields 4.7%.
  • PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY): The top countries include Bulgaria, Uruguay, Russia, Vietnam, Turkey and Indonesia; yields 5.53%.
  • WisdomTree Emerging Markets Local Debt (NYSEArca: ELD): Top countries include Malaysia, Brazil, Mexico, Indonesia, Thailand and South Africa.
  • Market Vectors Emerging Market Bond ETF (NYSEArca: EMLC): Top countries include Thailand, Poland, Turkey, Hungary and Malaysia; yields 6.45%.

With news of the Fed’s move spreading, bond traders are rushing to the high yields in junk bonds, which may be in a bubble-ish state, remarks Mike Mish Shedlock for Minyanville. Yields on global bonds rated CCC or lower versus government debt is around 10.1%, or 3.4% tighter than the past 12 years.

According to Goldman Sachs, bonds rated CCC+ and lower by the S&P or Caa1 by Moody’s were considered “expensive” under current economic growth projections. Lower-rated bonds are more sensitive to any slowdowns in the economy and the International Monetary Fund (IMF) expects global economic growth to fall short of its 3.75% forecast for the second half. [How to Cope With Junk Bond ETF Risk.]

For more information on the bonds market, visit our bond ETFs category.

Max Chen contributed to this article.

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.