With the U.S. economy appearing stronger from Q2 of this year, many investors turned their focus to the domestic market. This trend isn’t limited to the equity world either, as long-term Treasury securities have also seen solid inflows this year which can satisfy investors’ need for relatively better yield and capital appreciation.
The rush toward high-yield long-term treasuries became more prevalent on consistent upbeat economic data leasing to ripe speculation of sooner-than-expected policy tightening. Â Meanwhile, the Fed is likely to fully close its QE program next month pushing the U.S. dollar to the six-year highs against the yen.
However, these incidents have infused concerns about many developed and emerging markets around the globe. Investors target emerging market bond ETFs in search of higher yields. While taper talks ravaged the emerging market asset classes last year owing to the panic selling spurred by fears over the cease in cheap dollar inflows, the repetition of the same episode is less likely this year.
This was more true since the emerging market assets are undervalued now hinting that the sell-off is overdone. After all, thanks to the recent run-up long-term U.S. treasuries, yields fell considerably since the start of the year.
This will likely push some investors toward typically high-yield emerging market bond and currency ETF space. Notably, yield on 10-year U.S. treasuries stands at 2.62% (as of September 17, 2014).
Impact on Emerging Market Currency
Having said this, we expect certain erosion in the emerging market currencies. This can be validated by the 2% fall in Dreyfus Emerging Currency Fund (CEW) in the last one month (as of September 17, 2014).
The fund’s embedded income yield – which measures the annualized rate of return generated by a fund’s investments in both fixed income securities and derivatives exclusive of interest rate changes and translation in foreign exchange spot rates (as per WisdomTree definition) – stands at 4.58% as of September 17, 2014.
In fact, embedded income yield is higher at Brazil and India currency ETFs. BZFÂ and ICNÂ currently carry embedded income yield of 9.54% and 6.15%. These two ETFs have Zacks ETF Ranks of Strong Sell, though we expect price declines to be less than last year.
Target Dollar-denominated EM bond ETFs
