Emerging Market Debt Gets Roasted

From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley

You already know how we feel about the US Bond Market. 

We like the short side when it comes to treasuries.

Lately, we’ve been keeping a close eye on the long end of the curve since it hasn’t kept pace with shorter-term yields. Though this is still the case, the 30-year yield has found support in recent weeks as rates continue to rise across the curve. 

This should keep the bulls happy for now as an environment where long rates are making new lows is not supportive of higher prices for risk assets. 

But that’s not what’s happening. We remain in a rising-rate environment and don’t see signs of that changing anytime soon. As long as this remains the case, we want to be selling bonds and betting on higher prices for risk assets.

We’ve already discussed the US bond market plenty. Our position is clear.

In today's post, let's take a look outside the US and discuss how we're approaching international debt markets these days.

First up, the Emerging Market Bond ETF $EMB:

It turns out we’re approaching emerging market bonds the same way we are with US treasuries... we want to be short.

EMB has been carving out a top since the summer of 2020. Yesterday, it broke below a critical area of support at its pivot lows, completing the topping pattern and triggering a sell signal.

We want to be short EMB below 108.50 with a downside target of ~100 over the next 1-3 months.

To be clear, we can only be short if it’s below our risk level. All bets are off above 108.50.

Next, we have the Emerging Market High Yield Bond ETF $EMHY:

This has a similar look to EMB, above. The emerging-market high yield bond ETF has been chopping sideways in a distribution formation for the last 16 months. 

It just resolved lower and is currently trading at fresh 52-week lows. We want to be sellers on this weakness.

As long as EMHY is below 43, we want to be short with a measured move target of 39.75. 

If it reclaims our risk level, we have no business being short.

The bottom line is our outlook for bonds right now is bearish. Whether it’s US Treasuries or international bond markets -- the risk is to the downside. 

We want to continue to look for clean short setups with skewed risk/rewards to use as vehicles to express this thesis. EMHY and EMB are great examples. 

As long as rates around the world continue their upward ascent, these trades should work out in our favor. If they don’t, our risk is very limited. We’ll take a small loss and move on to other opportunities.

Thanks for reading. As always, let us know what you think.

And be sure to download this week’s Bond Report!