Another Problem ‘Emerges’

Ok, so with everyone (including and especially Jeff Gundlach) focused on high yield and the possibility that junk bonds might well be the canary in the coal mine for a risk rally that’s got more lives than a villain from a bad slasher flick, the next logical place to look for trouble is EM.

And more specifically, EM debt. This is another one of those trades that people have been warning about for months and on top of that, the ETFs in this space are another example of a liquidity mismatched nightmare.

We’ll get into this more tomorrow, but for now, do note the divergence between EMB and EEM:

“Unless the dollar rolls back over in a significant way over the coming days and weeks, we would expect the EEM to follow the EMB lower before long,” Miller Tabak writes, in a new note.

Also note that yields on the Bloomberg Barclays USD Agg. index had their biggest weekly jump since the election last week:

Part of this is undoubtedly attributable to the reemergence of idiosyncratic risk. As we’ve noted on too many occasions to count, it is never a good a idea to lose track of country-specific risk amid a broad-based EM rally. There’s a reason why you get compensated for investing in these locales and a big part of it is down to idiosyncratic risk.

“In recent discussions with macro clients, we have often debated if strength in EM this year has been driven by a broad ‘risk-on’ sentiment, with money flowing into EM products en masse, or a genuine improvement in various individual EM stories,” Goldman writes, in a note out Monday, adding that while “we certainly see the bull run this year as being driven by both a healthy risk-taking environment and fundamental improvement, ‘country risk’ is starting to increase across EM assets.”

So this is just one more thing to keep an eye on.