Friday, October 31, 2008

Watch Emerging Markets Bonds

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 is an ETF that carries the ticker PCY. Launched in October 2007, the one year chart shows historical volatility in the 5-10% range prior to the Lehman Brothers 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 last 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.

[source: StockCharts]


Bruce Krasting said...

Interesting. The market cap is so small. I will watch it for a while.

Anonymous said...

Thanks Bill. PCY is a neat addition to my bond screen.

On that screen I have BWX (investment grade foreign sovereign bonds), BIL (US T Bills), BSV (Vanguard short term bond fund), BND (Vanguard Total bond market fund, intermediate term), EDV (Vanguard zero coupon Treasury Bond fund), TLT (Lehman 20+Yr Treasury Bond Fund), TIP (Lehman TIPS Bond Fund), HYG (High Yield Corporate Bond Fund), JNK (guess!), SHM (Lehman Short Term Municipal Bond ETF), TFI (Lehman Municipal Bond ETF), and MUB (S&P National Municipal Bond Index Fund). And now PCY. I also have a chart of the Japanese nearest futures chart on the page because of Yen "carry trade" effects on T bonds, and a nearest futures T Bond chart too.

Until recently one had to have a Bloomberg or other professional bond "machine" to get any info on these many fixed income sectors. This is another of the many benefits that the ETF industry has brought us.

If anyone knows of a Ginny Mae ETF and/or a short term Treasury/Federal ETF (including Fanny and Freddie now), let me know.

Anonymous said...

it is quite crazy how the emerging markets have acted in the global pullback. I still think Brazil has value, but I do not think I can invest in it just yet.

Jesse W.

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