On Monday, we spent quite a bit of time talking about EM debt funds and the extent to which flows suggest the party may be coming to an end now that DM central banks are set to embark on a normalization push that can be taken some semblance of serious.
Specifically, we warned (again) that the inherent liquidity mismatch in EM debt ETFs poses a threat to unwitting investors and we also highlighted a good piece out yesterday afternoon from Bloomberg that flagged an anomaly in emerging market bond yields (an anomaly that has a lot to do with the fact that EM ETFs are skewed towards sovereign debt). You can read those posts here:
- ‘People Are Going To See There’s No Liquidity’: EM ETFs Face ‘Minsky Moment’
- An Anomaly Emerges In Emerging Markets
Well on Tuesday, we wanted to show you a couple of visuals that depict what’s going on here. Have a look at this:
What you see there highlighted in red (left pane) shows flows into EM bond funds decelerating to their slowest pace in 23 weeks.
You can see the slowdown in the following chart as well:
So yeah, the tide appears to be turning and if the hawkish rhetoric from DM policymakers gets louder, whatever’s left of those inflows (and remember, what you see above is all EM bond funds – some ETFs are already seeing money coming out) are going to turn into outflows – and right quick.