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Tuesday, 25 July 2017

Investors wary of bubble-like effect in ETFs tracking emerging market debt

The rapid growth of a BlackRock exchange-traded fund that tracks emerging markets debt is causing fear of a bubble-like effect, Natasha Doff writes for Bloomberg Markets. The iShares JP Morgan EM Local Government Bond ETF doubled in size this year, with over USD 3 bn inflows. “The risk is that if the carry trade unwinds, as tends to happen eventually, investors could race for the exit all at once and send the fund tumbling,” writes Doff.

The concern is particularly fraught given what the author sees as “volatile conditions” in emerging markets. “Such a selloff could be triggered by higher developed-world yields as central banks wind down easy monetary policy, like in 2013’s Taper Tantrum. That would dim the appeal for carry traders of borrowing [USD] to buy assets in higher-yielding developing world currencies,” writes Doff. A BlackRock spokesperson downplayed the concern, saying ETF holdings represent less than 2 percent of emerging market debt, which means it cannot be a driver for the market. But Bloomberg’s own numbers say ETFs account for about 12% of the USD 400 bn invested in emerging market bond funds.

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