Investors Load Up on Emerging Market HY Bonds

From the Desk of Ian Culley @IanCulley

A risk-on revival has captivated the markets.

Investors are rising to their feet…

They’re buying stocks. They’re buying crypto. They’re buying gold.

Hell, they’re even buying high-yield Emerging Market bonds!

Check out the Emerging Market High Yield Bond ETF $EMHY breaking to a new multi-year high:

I throw this EMHY breakout into the same camp as the Biotech ETF $XBI blast off — risk-on.

It’s downright impossible to hold a bearish outlook while investors dance with the riskiest bonds on offer.

If you actively trade bond ETFs, you gotta be long EMHY above 37. For me, the EMHY breakout isn’t a trading event. 

Instead, it’s all about the behavior behind the breakout. I see investors clamoring for risk assets, fueling my bull market conviction.

If high-yield EM bonds are resolving higher, I bet EM stocks will follow.

The charts support the logic:

EMHY has bottomed and rallied with the Emerging Market ETF $EEM at critical inflection points: the 2016 and 2020 lows.

Would it make too much sense for these two to follow the same pattern in 2024? I don’t think so.

If and when Emerging Market equities join the chorus, the stock market rally will gain momentum.

I can’t think of anything more bullish for the overall market.

Well, aside from a rally in Chinese equities. (But hey, the China ETF $FXI has stopped falling, so that’s a start.)

Am I reading too much into Emerging Market high-yield bonds?

Or will Emerging Market stocks be the next to rip higher?

-Ian

Countdown to FOMC

The market is pricing an initial 25-basis-point rate cut at the June meeting.

Here are the target rate probabilities based on fed funds futures:

Click the table to enlarge the view.

This data is from the CME FedWatch Tool as of March 7, 2024.

Thanks for reading.

Let us know what you think.

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