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Commentary

Possible opportunity in EM bonds

12 Jun 2013 by Jim Fickett.

I own the PIMCO emerging market local currency bond fund, PELAX. This is a long term holding, intended primarily as some diversification out of dollars (see Purchasing two PIMCO bond funds and Added to PELAX position). The price of PELAX is down 11% recently, hit by a combination of three things. First, the dollar is near a two-year high against a trade-weighted basket of currencies, which hurts bonds denominated in local currencies. Second, interest rates have been rising lately in most countries, which hurts bond prices generally. And third, some hints from the Fed that they might began to taper down their easing policies have hurt anything that most investors consider “risk assets”.

I suspect none of these things should worry a long-term value investor. The dollar is considered a safe haven now, but the Fed and Congress are both doing their best to ensure that view is proved wrong. Interest rates may well continue to rise in many places, but this fund has a short duration, and last time I checked real rates were rather high on the biggest holdings, suggesting that valuation was reasonable. And the rush into and out of risk assets is for speculators to worry about.

It will be worth looking at valuations of PELAX holdings from an absolute perspective, but I wanted to give notice of the possible opportunity now, since it could go away at any time.