Bearish Bets on Emerging-Market Bond ETF Surge to Record

Investors are the most bearish ever on the largest exchange traded fund for emerging-market bonds as concern the Federal Reserve will reduce stimulus prompts investors to dump debt from developing nations.

Short interest, a measure of shares borrowed and sold on speculation they will fall, on the iShares JPMorgan USD Emerging Markets Bond Fund surged to 8.5 million on June 5, according to data compiled by London-based Markit Group Ltd. That’s up from 1.9 million on Dec. 31 and is equivalent to 18 percent of the outstanding shares, the data showed.

Investors are retreating from emerging markets as speculation on whether the Fed will scale back quantitative easing pushes up Treasury yields, making developing country debt less attractive. JPMorgan’s EMBI Global index for dollar-denominated bonds fell 5.4 percent over the past month, the most since 2008, as anti-government protests in Turkey, mining strikes in South Africa and slower growth in China hurt investor confidence.

“We are in the initial phase of unwinding the QE liquidity,” Siobhan Morden, the head of fixed-income strategy at Jefferies Group LLC, said in a phone interview from New York. “Assets have been mispriced for too long. It raises the risk for another leg down.”

Average yields on emerging market dollar-denominated bonds rose 79 basis points, or 0.79 percentage point, over the past month to 5.4 percent on June 6, the highest in a year, JPMorgan data show.

Extra Yield

Investors demanded an extra 334 basis points in yield to hold the securities instead of U.S. Treasuries yesterday, the highest premium since August. The so-called spread narrowed to 330 basis points as of 9:14 a.m. in New York.

A government report showed U.S. employment increased more than forecast in May while the jobless rate climbed from a four-year low, keeping the debate going on whether the Fed will taper its bond purchases.

The iShares fund, which tracks JPMorgan’s EMBI Global Core Index, posted about $80 million in redemptions on June 5, the biggest one-day outflow since March, according to data compiled by Bloomberg. Investors yanked $1.1 billion out from the fund this year, after pouring in $5.1 billion over the past three years.

The surge in short interest is “a striking trend,” said Alex Brog, a director at Markit in London. “There was a lot of buildup in short interest before the recent price fall. It seems investors are expressing a directional view here.”

U.S. Employment

Emerging-market assets sold off in the past month as Fed Chairman Ben S. Bernanke said the central bank could slow unprecedented stimulus should the U.S. employment outlook show sustainable improvement.

Local-currency bonds slumped 7.3 percent in dollar terms over the past month through June 5, the most since 2009, according to JPMorgan’s global diversified index. The MSCI Emerging Market Index of stocks fell to a six-month low yesterday.

Turkish bond yields were poised for a weekly surge after Prime Minister Recep Tayyip Erdogan failed to calm investor concern as anti-government protesters demonstrated for the seventh day yesterday. Foreign investors sold a net 4.9 billion rand ($495 million) of South African bonds on May 29, the most since 2011, according to Johannesburg Stock Exchange data.

China’s gross domestic product expanded a less-than-estimated 7.7 percent in the first quarter and analysts last month trimmed forecasts for the April-June period to a median projection of 7.8 percent.

BlackRock’s View

BlackRock Inc., the world’s biggest money manager, said yesterday it reduced emerging market investment, citing concern a reduction in Fed bond purchases may curb support for the assets.

“We had very little exposure to local EM bonds but have trimmed our external EM positions recently to reduce the levels of risk from this sector,” Scott Thiel, the deputy chief investment officer for fundamental fixed-income in London, said in an e-mailed statement.

Investors pulled $1.5 billion out from emerging market bond funds in the week ending June 5, according to a Morgan Stanley report yesterday, citing data compiled by EPFR Global. It was a second weekly outflow and the largest since September 2011, according to Morgan Stanley.

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