Markets are discounting Asian governments' efforts to stimulate their way back to prosperity:
Institutional bond investors are hedging the chance that their Asian corporate bonds are exposed to default risk. Not all bond investors are so fretful. Some appear to be regaining their risk appetite and seeking out higher yields in emerging markets (near bottom of this article):
Of course, not all emerging market bonds are issued by Asian companies. I'm not long Asian bonds, so CDS hedging and yield chases don't immediately concern me. What does interest me is that bearish bets on higher-yielding bonds indicate pessimism on corporate earnings in Asia and other emerging markets. This strengthens my bearish outlook for emerging market equities, so I will continue to wait for further declines in VWO before going long.
Nota bene: Anthony J. Alfidi is long FXI with covered calls. He is short uncovered calls on VWO.
The Markit iTraxx Japan index of credit-default swaps, the benchmark gauge of 50 investment-grade companies including All Nippon Airways Co. and Japan Tobacco Inc., rose 9 basis points to 276 at 10:39 a.m. in Tokyo, according to BNP Paribas SA prices. Benchmarks in Asia outside Japan and Australia also rose, indicating strengthening perceptions that companies may default on their debt.
Institutional bond investors are hedging the chance that their Asian corporate bonds are exposed to default risk. Not all bond investors are so fretful. Some appear to be regaining their risk appetite and seeking out higher yields in emerging markets (near bottom of this article):
Emerging-market bonds are starting to draw investors. The extra yield they demand to own the debt instead of Treasuries fell to 6.94 percentage points from 8.62 percentage points in October, according to JPMorgan’s EMBI+ Index.
Of course, not all emerging market bonds are issued by Asian companies. I'm not long Asian bonds, so CDS hedging and yield chases don't immediately concern me. What does interest me is that bearish bets on higher-yielding bonds indicate pessimism on corporate earnings in Asia and other emerging markets. This strengthens my bearish outlook for emerging market equities, so I will continue to wait for further declines in VWO before going long.
Nota bene: Anthony J. Alfidi is long FXI with covered calls. He is short uncovered calls on VWO.
