Tuesday, August 24, 2010

The Quest for Yield and Where All that Money Central Banks Provide is Going

With capital now almost without limit in terms of national boundaries, and central banks cranking out cheap money to their customers (the banks), one keeps asking where all the money is going.  It is quite simple - bonds of all types... we focus on US Treasuries and their incredible rally (taking yields on 10 years from 4% to sub 2.6% since April 2010) but high yield corporates are flying, higher rates corporates are flying, German 10 years acting like U.S. 10 years, and emerging market bonds?  Forgettaboutit.

Sadly, some of these '2nd world' countries run much more fiscally sane policies than we do, so what was once 'risky' is now in many ways more 'safe'.  Granted, the next time there is a true panic I expect emerging markets (and even their bonds) to take a hit as the algorithms shut off and 'sell everything not named US Treasury' takes over, but you can see where all this easy money is going.   On top of this appreciation seen below, you actually receive some yield on your money (4.5-5.5%), unlike many developed markets.

Two for the road

iShares JP Morgan USD Emerging Markets Bond Fund (NYSEArca: EMB)

EMB has 64 holdings and a 0.60% expense ratio. The top country weightings are Brazil, Turkey, Mexico, Philippines, Indonesia, Venezuela and Colombia.

PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY)

PCY has 55 holdings and a o.50% expense ratio. Top countries include Uruguay, El Salvador, Russia, Turkey, Colombia, Indonesia and Poland.

No position

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