Concerns About a Crowded EM Trade

As emerging markets are rebounding and sovereign bond yields throughout the developed world remain low and, in some cases, negative, investors have been flocking to exchange traded funds such as the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB) and the PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY).

EMB has a 7.18 year duration and a 4.45% 30-day SEC yield. PCY has a 8.97 year duration and a 4.75% 30-day SEC yield. The VanEck Vectors Emerging Markets Aggregate Bond ETF (NYSEArca: EMAG) has a 4.65 year duration and a 3.94% 30-day SEC yield.

SEE MORE: It’s Easy to Explain Investors’ Affinity for EM Bond ETFs

However, some market observers are concerned the emerging markets bond trade is becoming a crowded trade. While yields in developed economies remain depressed, with some even trading with negative yields, emerging market bonds have quickly gained traction as one of the few areas left with attractive yields. The JPMorgan global diversified composite index that covers emerging market bonds has increased almost 15% year-to-date.

“Debt funds in EM saw net inflows of $2.4 billion in the latest weekly reporting period, according to Bank of America Merrill Lynch data. Emerging market equity fund net inflows have tapered off, at $1 billion in the latest week,” reports Dimitra DeFotis for Barron’s.

Emerging currencies have strengthened on improving commodity prices, notably the rebound in crude oil prices, as many developing economies are major exporters of raw materials.