Yield Hunger Creates a Bubble in Emerging Market Debt Again

| About: PowerShares Emerging (PCY)

This Economist article has a 12-year chart of emerging-market spreads and yields.

The chart shows the JP Morgan emerging-market bond index, not the DB Emerging Market USD Liquid Balanced Index used by PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEARCA:PCY) which we are using for our cheap volatility play. However, they are highly correlated.

For emerging market (EM) debt, yields (at 6-7%) are at all time lows, while the spreads versus Treasuries (under 400 bps) are back to credit bubble (2004-2008) levels.

Desperation and ravenous yield hunger causes investors to make mistakes. Would it kill fund managers to sit in cash for a year and NOT buy EM debt during the ongoing, worldwide, sovereign solvency crisis?

The opportunity cost of doing so would be so low - equal to the spread of EM debt over Treasuries - which is less than 400 bps!