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Investors is flocking to fixed income bond ETFs and mutual funds in the current market calamity. Long term treasuries (TLT, TLH) rose most (TLT rose 8% in the last four days), representing safe havens even after the debt ceiling fiasco.

The following shows the current fixed income ETF trend ranking, as 8/3/2011.

Assets Class Symbols 08/03 Trend Score 07/27 Trend Score Direction
20+ Year Treasury TLT 9.25% 2.77% ^
10-20 Year Treasury TLH 7.04% 3.3% ^
International Inflation Protected WIP 6.46% 6.86% v
Inflation Protected TIP 6.03% 4.45% ^
Intermediate Treasury IEF 5.85% 3.24% ^
Emerging Mkt Bonds PCY 5.13% 2.94% ^
Long Term Credit LQD 4.68% 2.61% ^
California Muni CMF 4.3% 3.98% ^
International Treasury BWX 3.65% 4.75% v
National Muni MUB 3.45% 2.31% ^
Intermediate Term Credit CIU 3.28% 2.06% ^
US Total Bond BND 3.24% 1.7% ^
New York Muni NYF 3.19% 4.47% v
High Yield JNK 2.52% 3.74% v
MBS Bond MBB 2.44% 1.26% ^
Short Term Credit CSJ 1.16% 0.85% ^
Short Term Treasury SHY 0.7% 0.47% ^
Treasury Bills SHV 0.04% 0.01% ^

The trend score is defined as the average of 1,4,13,26 and 52 week total returns (including dividend reinvested).

For more detailed asset ranking, refer here.

Noticeably, emerging market debts (PCY, EMB) rose along with other bond ETFs. This is unusual as in a normal situation, emerging market bonds are considered to be the riskiest (think about what happened in 2008).

The following are some key observations:

  • The reason behind the strength of emerging market and international bonds (NYSEARCA:BWX) is the determined U.S. policy to devalue U.S. dollars.
  • Current market difficulty arose from developed countries' debt situation, especially in the U.S. and peripheral European countries. .
  • Japan and Switzerland just started currency devaluation actions which were called 'currency war' by Brazillian finance minister.

With the under valued currencies and better balance sheets, emerging market debts should be considered by investors who would like to diversify their fixed income investing. Furthermore, given the U.S. debt situation, one should be cautioned that current flight to safety U.S. treasury strength will not last: when market stabilizes, investors will realize that expected high inflation ahead and they will start to dump such 'safe' bonds again. We would, however, expect that when market eventually bottoms, emerging market debts will still do well.

Diversified portfolios that have emerging bonds as candidate funds have done reasonably well. For example, in the Retirement Income ETFs, the tactical and strategic asset allocation portfolios have started to rotate to emerging market debts several months ago due to their strength.

The following shows the historical performance of the Tactical Asset Allocation moderate portfolio (at most 60% in risk asset, at least 40% in fixed income):

From 12/31/2000 To 08/04/2011: due to space limitation, 2001-2006 performance is omitted here.

2007 2008 2009 2010 2011 1 Yr 3 Yr 5 Yr Inception
Annualized Return (%) 14.29 -1.38 15.2 11.01 3.73 7.87 10.46 10.06 11.16
Sharpe Ratio (%) 69.46 -27.54 112.28 76.29 42.96 118 91.38 76.8 92.02
Alpha(%) 0.04 0 0.04 0.01 0.02 0.01 0.04 0.04 0.04
Beta 0.903 -0.021 0.179 0.679 0.584 0.557 0.134 0.199 0.19
RSquare 0.796 0.011 0.132 0.732 0.792 0.674 0.101 0.159 0.14
Standard Deviation 0.162 0.084 0.135 0.143 0.086 0.092 0.123 0.125 0.109
Treynor Ratio 0.125 1.082 0.845 0.161 0.063 0.196 0.843 0.483 0.528
Draw Down 0.105 0.078 0.058 0.094 0.034 0.059 0.094 0.129 0.144
Sortino Ratio 0.945 -0.369 1.716 1.08 0.592 1.659 1.332 1.088 1.303

Currently, for example, the portfolio holds both EMB and PCY in its fixed income portion.

Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

Disclosure: I am long EMB.

Source: Emerging Market/International Bonds Still Good Hedge Against Dollar Devaluation