Over the weekend, we revisited the whole “maybe it’s time to start trimming EM exposure” idea. You can read that post here:
The thesis is pretty simple. This is a space that’s rallied spectacularly despite the fact that the list of potential headwinds is about a mile long and includes things like i) an intractable political crisis in Brazil, ii) China putting the brakes on credit creation, and iii) the Fed trying to normalize policy.
A weak dollar has helped and the artificial suppression of cross-asset vol has created a veritable Goldilocks environment for carry, but you have to wonder at this point whether people are pressing their luck in an effort to squeeze every last drop out of an already stretched rally.
Indeed, as Barclays noted last week, the hedges in CDX EM look to be coming off as investors’ collective comfort level increases:
Well, to the extent anyone is worried, it certainly did not show up in iShares J.P. Morgan USD Emerging Markets Bond ETF on Friday because as you can see below, it got its biggest one-day flow of the year headed into the weekend:
“Carry” on but maybe a little self-reflection is in order…