April 27, 2010 – Cash is Piling into Emerging Market Debt

Featured Trades: (PCY), (LQD)


2) Cash is Piling into Emerging Market Debt. Last year, I suggested emerging market sovereign debt ETF’s as safe, high yielding investments in which to hide out in case the equity markets swoon again (click here for the call). With hedge funds scrambling to pile on more risk, and mutual funds now blatantly chasing performance, the Invesco PowerShares Emerging Market Sovereign Debt ETF (PCY) has exploded to the upside. It seems that the higher equities go, the more people want to buy safe bonds. This ETF has 40% of its assets in Latin American bonds and 31% in Asia. The two-year-old fund now boasts $536 million in market cap and pays a handy 6.29% dividend. This beats the daylights out of the one basis point you currently earn for cash, the 3.80% yield on 10 year Treasuries, and still exceeds the 5.37% dividend on the iShares Investment Grade Bond ETN (LQD), which buys predominantly single ‘A’ US corporates. The big difference here is that the countries that make up the PCY have a much rosier future of credit upgrades to look forward to. It turns out that many emerging markets have little or no debt, because until recently, investors thought their credit quality was too poor. No doubt a history of defaults in Brazil and Argentina in the seventies and eighties is at the back of their minds. Not so for the US, which has bond issuance going through the roof, and downgrade noises growing ever louder. A price appreciation of 130% over the past year tells you this is not exactly an undiscovered concept. Still, it is something to keep on your ‘buy on dips’ list.

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