EMB: Dollar Denominated EM Bonds Are Not Compelling Right Now

seekingalpha08-31

2d illustrations and photosThesis The iShares J.P. Morgan USD Emerging Markets Bond ETF (NASDAQ:EMB) is a fixed income exchange-traded fund. The vehicle represents one of the largest sovereign EM hard...

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Morgan USD Emerging Markets Bond ETF (NASDAQ:EMB) is a fixed income exchange-traded fund. The vehicle represents one of the largest sovereign EM hard...</p>\n\n<a href=\"https://seekingalpha.com/article/4718291-emb-dollar-denominated-em-bonds-are-not-compelling-right-now\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"JNK","symbol_name":"债券指数ETF-SPDR Barclays高收益债","start_time":0,"source_url":"https://seekingalpha.com/article/4718291-emb-dollar-denominated-em-bonds-are-not-compelling-right-now","article_id":"2463219728","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1323375651/image_1323375651.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2463219728","pubTimestamp":1725080400,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"2d illustrations and photosThesis The iShares J.P. 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The vehicle represents one of the largest sovereign EM hard currency debt funds, and constitutes a preferred and liquid way to invest in dollar denominated emerging market bonds. In today's article we are going to take a deep dive into the fund, its composition and analytics, and highlight why we do not believe that EMB offers an attractive entry point in today's macro environment. Not a dollar play, but a hard currency fund If you are thinking the dollar has peaked and are looking for EM bond funds to express that view, EMB is not a fund you should consider. This ETF only contains dollar denominated sovereign bonds, thus only runs interest rate and credit risk: The iShares J.P. Morgan USD Emerging Markets Bond ETF seeks to track the investment results of an index composed of U.S. dollar-denominated, emerging market bonds. The respective index is the J.P. Morgan EMBI Global Core Index, and its literature can be found here. The ETF contains over 600 names and comes with a 7.15 years duration: Analytics (Fund Website)Via its duration profile, the fund falls in the intermediate duration bucket, and has been helped this year by the fall in yields on the back of a telegraphed September Fed cut. Please note, the name comes with a 5.8% 30-day SEC yield, and has an option adjusted spread of 254 bps. OAS represents the compensation offered by the portfolio for its credit risk. The fund contains mainly investment grade sovereigns, with its parsing as follows:  AA rated: 7.6% A rated: 17.4% BBB rated: 28% BB rated: 23% B rated: 17% CCC and below: 7%  The fund has a large exposure to Saudi Arabia (6%), followed by Mexico (5.8%), Turkey (5%) and Indonesia at 4.8%. Performance The ETF is up this year, with rates lower and spreads slightly tighter: Data by YChartsWe are using the iShares 7-10 Year Treasury Bond ETF (IEF) as a comparison point since the name is a pure rates play, and has a duration profile similar to EMB. We are also using the SPDR Bloomberg High Yield Bond ETF (JNK) in the above graph as a relative value comparison, with some investors looking at USD EM and U.S. HY as alternatives. EMB and JNK have very similar performances, driven by both spreads and rates, while IEF shows how rates have accounted in the EMB total return. If we switch the above graph to a total return (i.e. dividends included), we get the following picture: Data by YChartsEMB comes with a 9.8% annual standard deviation, and an annualized volatility of 8.4%, both of which can be found in the 'Risk' tab on the Seeking Alpha platform. JNK has a low duration of only 3 years, and contains U.S. high-yield bonds, while EMB has a 7-year duration and contains mostly IG EM sovereigns. We are of the belief that intermediate rates are at fair value now, with a 2.5% to 3% being the new norm for Fed Funds ('FFs') going forward (one can see that value from the Fed Funds futures curve). If FFs are going to be at 3% going forward then given the concept of term premium one should expect seven-year rates to stabilize in the 3.5% to 4% range: Term Premia (Schwab)While the post-Covid environment with massive fiscal and monetary stimulus saw a negative term premium, we are of the belief that a normalized economic environment will require a 'fair value' one. Namely, do not expect negative term premiums for the intermediate portion of the yield curve going forward. That translates into most of the duration benefit coming from rates being already embedded in the fund NAV. With rates being at 'fair value' in our opinion, let us have a look at EM spreads: EM Spreads (Barings)Spreads are now touching multi-decade lows, as per the above chart from Barings. As a reminder, you want to buy EM bonds when spreads are high, and just hold or sell when they are low. A benign risk environment and a high all-in yield level have resulted in a significant tightening of spreads, not leaving much room for further moves. Barclays in their EM piece also highlights the current unattractive proposal displayed by EM debt: EM bond valuations do not look overly attractive in absolute or in relative terms compared with historical levels or other debt markets. A relatively robust growth backdrop, as seen in India for example, however, leaves potential scope for select opportunities. What is next for EMB We have established in the above section that EM spreads are very tight and that intermediate rates are at 'fair value' as per term premia and Fed Funds futures curve. With the two risk factors for the name flashing warning signs, EMB is therefore just a carry trade currently. The fund offers a 30-day SEC yield of 5.8% currently, against a backdrop of a 9.8% annualized volatility. In our mind, EMB does not present a compelling thesis to buy, and purely remains a hold in a large, diversified portfolio. Some retail investors might be even tempted to rotate out of the name for more compelling alternatives. However, we have to acknowledge that this fund caters to institutional investors via its large AUM of $16 billion and its large daily liquidity. Thus, it will represent a portfolio allocation irrespective of forward for many holders. Conclusion  EMB is a fixed income ETF from iShares. The fund provides exposure to dollar denominated sovereign bonds, and thus represents a credit spread and rates play, not a dollar one. The ETF comes with a very large AUM and daily liquidity, and has seen a robust performance in 2024 as intermediate rates have come down, and credit spreads have tightened. We believe rates are now at 'fair value', while credit spreads are historically very tight. We do not believe today's pricing offers a compelling proposal for an entry, and rate this name a 'Hold'.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2463219728"}