Record outflows at top emerging-market ETF as rate hikes loom

Record outflows at top emerging-market ETF as rate hikes loom

Record outflows at top emerging-market ETF as rate hikes loom A major emerging-market ETF saw a record amount of redemptions recently, possibly signalling that investors are getting cold feet about taking on risky assets given prospective rises in global interest rates.

A net US$818.5mn was pulled out of the iShares JP Morgan USD Emerging Markets Bond ETF in the five days through July 7, according to the Wall Street Journal. That was its biggest weekly outflow since its 2007 launch, based on data from FactSet. ranks the US$11.7-bn fund as the largest emerging-markets bond ETF by total assets.

The exodus from emerging-market dollar debt came after central bankers in the UK, Canada, and the Eurozone issued separate comments suggesting their respective economies have recovered enough for them to possibly step back from easy monetary policies. The yields on benchmark government bonds in the US and Germany have since picked up; the 10-year bund recently hit its highest level since early 2016.

In terms of weekly flows, ETFs can be flighty. In the five days ended June 9, the iShares emerging-market bond ETF in question absorbed US$899.8m, making it the biggest week in the fund’s history. And year-to-date investments in the fund have reached a net total of US$3.6bn.

Following the 2008 global financial crisis, many major central banks went on a bond-buying spree to try and stabilize their economies, which helped drive yields lower. The Federal Reserve has reversed course since then, stopping its bond purchases and hiking short-term interest rates. More central banks seem set to adopt tighter policies as well.

The ultra-low interest rates that were caused in part by the central banks’ aggressive purchases forced many investors to seek better returns from higher-risk assets, such as those in emerging markets. As returns on debt rise, the edge offered by emerging-market debt becomes less appealing.  Markets saw this in 2013’s taper tantrum, when the Fed signalled the end of its asset purchases, causing a widespread unloading of bonds that subsequently rocked emerging markets.

The 10-year Treasury yield stabilized at 2.371% on Monday in New York, according to the Journal. If the 10-year Treasury yield gets close to 3%, it can be a more significant trigger to reverse fund flows, according to Khhon Goh, head of Asia research at ANZ.

According to data from ANZ, foreign investors have grabbed emerging-market debt in Asia, except for China, in each of the first six months of 2017, injecting US$6.1bn into those bonds in June alone. The inflows have slowed down more recently, as inflows last month reached their lowest since March.

Kisoo Park, a global bond manager at Manulife Asset Management in Hong Kong, said global rates are likely to rise more than many market participants expect, but not to absolute levels that would inspire large outflows from emerging markets.

“You want to be in a country that has an improving fundamental trend and high yields, like Indonesia and India,” he said, noting that he owns bonds in both countries.

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