Keep an Eye on Emerging Markets Bonds

Nov. 2.08 | About: PowerShares Emerging (PCY)

I know a number of equities-only investors who have started following the bond markets for the first time ever over the course of the past year after becoming tired of being blind-sided by inter-market relationships.

Of the many credit market data points, LIBOR, the TED spread, OIS-LIBOR and others have received a fair amount of press as of late as measures of liquidity. More traditional bond market indicators focus more on risk than liquidity and include the spread between corporate and government bonds or between investment grade and high yield corporate bonds.

I want to suggest another bond market indicator – one that can provide a reflection on the workings of the global economy. The PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEARCA:PCY) is an ETF launched in October 2007.

The one year chart (click to enlarge, below) shows historical volatility in the 5-10% range prior to the Lehman Brothers (LEH) collapse last month. Historical volatility is now above 100% after a month and a half of pure chaos.

As the chart below shows, PCY lost almost half of its value during the past month and appears to have bottomed a week ago Friday. Note the new buying interest over the course of the last few days, as investors have sought out emerging markets debt as a value play.

In many ways, emerging markets are the focal point of many of the issues facing today’s global economy, from the credit crisis to the demand for commodities to the prospects for renewed global growth down the road.

Keep an eye on PCY, not only as an indicator, but also for its investment potential.

Click to enlarge