EM Capitulation

EM Capitulation

Yesterday, someone threw in the towel on EM bonds. The Van Eck JP Morgan Emerging Market Local Currency Debt ETF (EMLC) is the largest and most liquid vehicle to invest in emerging market local currency bonds. In one trade yesterday, someone pushed through a block of 18,841,690 shares, valued at around $320M. Interestingly, the price only fell 1.5 cents on that volume.

Get The Timeless Reading eBook in PDF

Get the entire 10-part series on Timeless Reading in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

We respect your email privacy

Q1 hedge fund letters, conference, scoops etc, Also read Lear Capital: Financial Products You Should Avoid?

In the chart below, I show the price and volume for the EMLC over the previous five years. Yesterday’s action is extreme by any metric. For an ETF that normally trades around 3 million shares per day, this was an explosion of 10x the normal daily volume.

EM Capitulation

Both US investment grade and EM spreads have been widening recently as oil prices consolidate.

EM Capitulation

The funny thing is that US high-yield spreads are mostly sideways over the last few months. This has resulted in a huge compression in the spread between US HY OAS (high-yield option-adjusted spreads) and EM OAS. This spread is now the narrowest it has been in over three years. After peaking at over 300bps in early 2016, the relative spread is down to just 85bps.

EM Capitulation

Not only has the spread between EM OAS and US HY OAS compressed, but there has not been any sort of meaningful volume pick-up in the iShares iBoxx High Yield Corporate Bond ETF (HYG). In the chart below, in the top panel, I show the relative price of the EMLC to the HYG (indexed) over the last five years. The EMLC is making a relative low. In the second panel, I show the explosion in the volume of the EMLC. In the third panel, I show the volume of the HYG.

EM Capitulation

While confidence is rising high for US high-yield bonds, yesterday sure looked like a capitulation in EM bonds.

Article by Steven Vannelli, CFA - Knowledge Leaders Capital


Saved Articles

The Life and Career of Charlie Munger

Charlie is more than just Warren Buffett’s friend and Berkshire Hathaway’s Vice Chairman – Buffett has actually credited him with redefining how he looks at investing. Now you can learn from Charlie firsthand via this incredible ebook and over a dozen other famous investor studies by signing up below:

  • Learn from the best and forever change your investing perspective
  • One incredible tidbit of knowledge after another in the page-turning masterpiece of a book
  • Discover the secrets to Charlie’s success and how to apply it to your investing
Never Miss A Story!
Subscribe to ValueWalk Newsletter. We respect your privacy.

Congrats! Are you a smart person?

We have an exclusive targeted for being a sophisticated and loyal reader.

Welcome in the new year by signing up up for ValueWalkPremium today and get our exclusive content for 40% off. This is our second biggest discount ever!!

Use coupon code VIP20 or click on the button below

Limited time offer only ENDS 1/31/2019 or after next 30 23 subscribers take advantage whichever comes first – please do not share this discount with others