Seasonal Trends For EM Bonds?


Plenty of equity traders and investors follow seasonal trends. For example, it is widely known that tehre is a good six-month period in which to be long stocks and another six-month time frame is trying for equity bulls. The strong period started in November.

That is just one example of the many seasonal trends traders use. Commodities traders love seasonal trends. Gold bugs buying up the yellow metal in advance of India's wedding season is one example. But what about bonds? Are there seasonal trends for this asset class?

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Perhaps. On Thursday, Barron's highlighted some interesting factoids from Ned Davis Research about on this year's shining asset classes: Emerging markets bonds.

A bullish December for emerging markets debt would be keeping with the theme of surging inflows to the ETFs that track these bonds. The track record is in place.

Using the Barclays Emerging Markets Bond Index as the measuring stick, Ned Davis Research points out that emerging markets bonds have risen in 17 of the past 19 Decembers, Barron's reports. Of the two down years in the sample, 1998 was one of them and with good reason. That is the year and several Asian economies suffered through major debt crises.

For many investors ETFs that track either dollar-denominated or bond denominated in local currencies have become the preferred avenue for accessing emerging markets debt. In terms of evaluating these ETFs on the basis of seasonality, it must be noted that none of the marquee emerging markets bond ETFs track the Barclays Emerging Markets Bond Index and none of these ETFs are anywhere close to 19 years old.

With that in mind, a couple of the familiar names among emerging markets debt ETFs have a few Decembers under their respective belts. That may give investors some indication as to what to expect this month.

iShares J.P. Morgan USD Emerging Markets Bond Fund (NYSE:EMB) Home to almost $6.8 billion in assets under management, the iShares J.P. Morgan USD Emerging Markets Bond Fund is the largest emerging markets bond ETF on the market today. EMB debuted in the middle of December 2007, so for the purposes of this exercise, that December was excluded because it was not a full trading month for the ETF.

Over the previous four Decembers, EMB has been a decent performer. It made a nice gain in December 2008, followed by a flat performance the next year. In December 2010, the ETF traded lower. Last December, EMB notched a small gain even as traders departed riskier assets, of which they view emerging markets debt, even the dollar-denominated variety held by EMB. EMB is off 0.14% to start this month.

PowerShares Emerging Markets Sovereign Debt Portfolio (NYSE:PCY) The PowerShares Emerging Markets Sovereign Debt Portfolio, EMB's primary rival, debuted in October 2007, so there is one more full December with which to evaluate this ETF's tendency for a Santa Claus rally.

Since EMB and PCY can move in lockstep with each other over short-term time frames, it is not surprising to see that from December 2007 through December 2011 the two ETFs had similar track records. For PCY that means three December gains (2007, 2008 and 2011) and two losses (2009 and 2010).

This month, PCY has moved in unison with EMB and is down 0.13 percent.

Non-Dollar ETFs Given the ages of EMB and PCY, it is fair to say emerging markets bond ETFs are a fairly new concept. If that is the case, then those ETFs that track developing nations' debt denominated in local currencies are babies. The two dominant funds in the local currency EM bond space are the WisdomTree Emerging Markets Local Debt Fund (NYSE:ELD) and the Market Vectors Emerging Markets Local Curr Bond ETF (NYSE:EMLC), both of which have over $1 billion in AUM.

The data samples with each are small as this month is just the third December of trading for each ETF. ELD and EMLC rose in December 2010, but traded last December amid the risk-off, flight-to-quality trade. The two are off to a good start this month. ELD is up nearly 0.9 percent while EMLC is higher by half a percent.

For more on emerging markets bond ETFs, click here.

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