We have been extensively covering the rising interest rate environment as longer-dated Treasury notes and bonds have been falling in value and rising in yields. Today’s ratings agency news that Standard & Poor’s was removing the “Negative” outlook from the United States ratings only added that much more pressure to bond prices as an indicator that the economy was continuing to improve. It turns out that the bear market risk is rising and coming home to visit in emerging market bonds as well. The profile for emerging market stocks is also coming under fire.
The iShares JPMorgan USD Emerging Markets Bond (NYSEMKT: EMB) product even hit a new 52-week low of $111.88 on Monday. The exchange-traded product closed down $1.16 or 1% at $112.22 against a 52-week range of $111.88 to $124.43. This ETF’s annualized yield is currently screening out at 4.38% if the dividend remains static.
The “EMB” aims to track the JPMorgan EMBI Global Core Index, which is diversified U.S. dollar-denominated emerging markets debt benchmark tracking the total return of actively traded external debt instruments in emerging market countries.
Unfortunately, emerging market stocks have note been holding up well either as international money has been focusing on the United States as the safety trade with sustainable growth at a time when BRIC nations have been facing growing pains. The iShares MSCI Emerging Markets Index (NYSEMKT: EEM) closed down 1.3% at $40.14 and its 52-week trading range is $36.88 to $45.33.
If rates are going to rise in the U.S. then they have almost no alternative but to rise internationally as well. That means lower prices for bond funds, whether they are domestic or in emerging markets. While U.S. stocks are adjusting to the risk of higher rates and while investors reshuffle their portfolios, it seems that neither emerging market debt nor emerging market stocks are offering any great sense of safety yet.
We always want to show you the flip side of any story, and we feel we have to in this case. The “EEM” ETF is now down about 10% just in the last month or so. When the interest comes back into this sector, it comes in with a vengeance. Here are two charts to consider. The first is the one-year chart for the “EEM” equity ETF followed by the “EMB” that shows you just how bad things have been in the last month.