Emerging market bond sales have soared past analyst estimates for the first half of 2014, as investors flock to higher yields. $268B of bonds sold so far this year, compared to the $240B sold in the same period of 2013.
Due to a dovish Fed, U.S. yields have fallen this year to 2.5% from end-2013 levels of 3%. As a result, increased demand for higher yield has investors trading emerging market bonds despite geo-political risks.
"The default rate is non-existent," he says, agreeing that fundamentals in high-yield look good. "Instead of a default cycle, we've had a refinance cycle." The issue, however, is valuation. At the end of 2013, the 30-year Treasury yielded about 4%, while BB corporates "unbelievably" yielded just 4.5% - a "remarkably low incremental yield."
His feelings about overvaluation extend to the investment grade corporate market (LQD) as well.
Most curious to Gundlach is how universally the long bond is hated at 4%, while junk yielding 4.5% gets so much love.
Besides Treasurys, Gundlach sees value in emerging market bonds. The risk is in the currency, but this can be eliminated by buying dollar-denominated paper.
The EGShares TCW EM Short Term Investment Grade Bond ETF (SEMF), Intermediate Term Investment Grade Bond ETF (IEMF), and Long Term Investment Grade Bond ETF (LEMF) will begin trading on January 8th; offering exposure to both sovereign and corporate bonds.
Each new fund will charge 0.65%, which is above the average expense ratio for this sector, but few funds currently offer specific duration exposure to emerging market bonds.
DES follows the performance of the small cap segment of the U.S. dividend paying market and is now the 8th WisdomTree (WETF) fund to cross the billion dollar mark.
Luciano Siracusano, WisdomTree Chief Investment Strategist, commented, "By weighting the U.S., small cap market by the dividends companies pay, WisdomTree has been able to create a potential source of income for investors looking for alternatives in today's low-interest rate environment."
This ETF has been on the market since 2006 and has attracted investors with its relatively low expense ratio of 0.38% and an average dividend yield of nearly 3%.
Emerging market bond ETF investors worried about duration risk will have their first short-duration fund to choose from starting today with the launch of ProShares' Short-Term USD Emerging Markets Bond ETF (EMSH). The fund has an expense ratio of 0.5%.
The underlying index only selects paper with a fixed rate and maturity of 0-5 years, with a weighted average yield-to-maturity of three years or less. Sovereign, and corporate - both investment and speculative grade - will be included.
As comparison, the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) has a 7-year effective duration.
Market Vectors files paperwork for the Emerging Markets Aggregate Bond ETF EMAG, with an after-fee-waiver annual expense ratio of 0.49%.
The fund will hold both sovereign and corporate, and both investment grade and high-yield paper from a large number of emerging market countries. At the end of Q3, the tracked index held about 1,800 bonds from a total of 694 issuers.
Market Vectors' Emerging Markets Local Currency Bond ETF (EMLC) has just over $1B in AUM.
"Sovereign emerging-market yields today are consistent with their averages between 2003 and 2007, but U.S. Treasury rates are only about half as high," writes Shuli Ren, in a bullish piece on emerging-market debt.
The premise is simple: 17 consecutive weeks of EM bond fund outflows has "flooded out irrational exuberance that had piled up over the winter and spring" and brought the market back down to earth, even as institutional demand has remained strong, suggesting retail investors have overreacted to taper talk.
With the Fed still striking a highly accommodative tone, emerging-market debt could rally as investors discover the relatively attractive valuations.
Anything paying income is again being particularly hard hit by the rise in Treasury yields (the 10-year now at a 2-year high of 2.8%).
Selections in mREITs (REM -2.1%), (MORT -1.9%) include RAIT Financial Trust (RAS -4.1%) - whose IRT had an ill-timed IPO yesterday and Ellington Residential (EARN -4.8%) - the market not caring about reasonable Q2 performance, a hefty discount to book, and the launch of a repurchase program. Other mREITs: CYS Investments (CYS -3.6%), Apollo (AMTG -3%), Newcastle (NCT -5%), Invesco (IVR -2.7%), Arlington Asset (AI -1.2%). A leveraged ETF play: MORL.
Hanging in there relatively well are the BDCs: Fifth Street (FSC -1.3%), Triangle (TCAP -1%), MCG (MCGC -1.2%), Hercules (HTGC -1.2%), Ares (ARCC -0.3%).
Guggenheim announces the closing of its Chinese Yuan bond ETF (RMB), effective June 14 as the fund failed to generate significant investor interest since its 2011 launch. The fund’s May dividend distribution will be suspended which should maximize the amount shareholders will receive at liquidation on or about June 21st.
PowerShares adds another to the emerging market debt ETF space, prepping the launch of the Fundamental Emerging Markets Local Debt Portfolio (PFEM), with annual cost of 0.50%. The fund will join a space anchored by PowerShares' own PCY, WisdomTree's ELD, and iShares' EMB. Others: LEMB, EMLC.
Argentina is due to appear in a New York Appeals Court today, when it will try to persuade the judge to reverse a ruling that it pay $1.3B to investors that refused to accept the country's debt restructuring after it defaulted 2001. The case could "create unrest in the credit markets and result in cascades of litigation," says Bank of New York Mellon (BK).
Vanguard plans the launch of an international aggregate bond ETF - the Vanguard Total International Bond Index Fund - by the end of Q2. More enticing, the fund will have a 0.20% expense ratio - less than the originally slated 0.30% - and a planned 0.25% purchase fee has been eliminated.
Headed into the year's final sessions, the iShares Emerging Markets ETF (EEM) - +13.7% - has caught up to and barely passed the S&P 500. Next year's excitement in emerging markets, writes Josh Brown, could be in their government debt (see ELD), where the fiscal metrics look far better than those of developed nations.
The hunt for yield moves to Mongolia, where the oft-rescued country pulls off a sale of $1.5B in 5 and 10-year notes at rates in the 4%-5% area. At nearly 20% of Mongolia's GDP, $1.5B is the equivalent of the U.S. borrowing $2.5T. A hot spot a couple of years ago, sliding commodity prices have hit the country hard, and the government finds itself borrowing from the central bank (called QE in the U.S.) to pay its bills.
Yield-starved investors are moving assets into emerging-market corporate debt ETFs, and the industry responds by upping the number of products offered to 10 from just 3 at the end of 2011. There's still plenty of room for growth - in total, such ETFs (a selection here) have about $1B AUM with the size of the EM corporate debt market at $776B. The largest U.S. corporate debt ETF, LQD alone has about $25B AUM.
Emerging debt remains remains frothy despite growing economic headwinds, writes Mike Riddell, noting an issue of long-term Peruvian debt last week hit a yield spread to Treasurys of just 109 bps. Given the bid-ask on this illiquid paper is 100 bps, it is pricing in almost no credit risk. It's pre-2008 territory. "Bubbletastic."
WisdomTree Emerging Markets Local Debt Fund seeks a high level of total returns consisting of both income and capital appreciation. The fund attempts to achieve its investment objective through investment in local debt denominated in the currencies of emerging market countries.
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