Developing market debt ETFs such as iShares J.P. Morgan USD Emerging Markets Bond Fund (NYSEArca: EMB) and the PowerShares Emerging Markets Sovereign Debt Fund (NYSEArca: PCY) have been popular this year with investors stretching for extra yield.
However, emerging market debt ETFs have been caught in a downward spiral since the end of April amid rising U.S. Treasury yields and speculation the Federal Reserve may trim its bond purchases. [Short Interest Surges in EM Bond ETF]
Emerging market currency ETFs have also been under pressure as U.S. government bond rates rise. [South Africa ETF Drops as Rand Hits Four-Year Low]
“Higher-yielding emerging-market assets have absorbed a pounding since early May as both weakening growth outlooks for the EM world and flight from riskier assets have stoked a broad shift away from EM bonds, stocks and currencies,” Dow Jones Newswires reports.
PCY and EMB are both down more than 10% from their recent highs and fell to fresh 52-week lows on Tuesday before recovering somewhat.
Next page: ‘Reaching for yield’
Other ETFs in the category include WisdomTree Emerging Markets Local Debt (NYSEArca: ELD), Market Vectors Emerging Markets Local Currency Bond (NYSEArca: EMLC) and SPDR Barclays Capital Emerging Markets Local Bond (NYSEArca: EBND). Some of the ETFs are denominated in U.S. dollars, others in local currencies. [Is the Party Over for High-Yield Emerging Market Bond ETFs?]
The funds have been under heavy pressure since Fed chief Ben Bernanke said the central bank was watching for signs of investors “reaching for yield” and other forms of excessive risk-taking. Fed officials have also hinted they would taper if U.S. economic data continues to improve.
“The sell-off in Treasury prices and the accompanying rise in yields that followed indications from the Fed last month that it stood ready to temper bond purchases has already rumbled emerging markets from Poland to South Africa by curbing the relative attractiveness of emerging market debt and fanning concerns that there will be less spare cash in the financial system,” according to a separate Dow Jones report.
iShares J.P. Morgan USD Emerging Markets Bond Fund
Full disclosure: Tom Lydon’s clients own EMB.