Per IU WisdomTree has filed for an Asia bond fund, one covering Latin America and a third for Europe-Middle East-Africa aka EMEA.
The Asia fund will cover the usual suspects but exclude Japan. The Latin America fund will cover most of the usual suspects but also a couple of not so usual, those being Uruguay and Panama (the US dollar is the currency in Panama). The EMEA fund will cover the most unique ground including Czech Republic, Egypt, Qatar and Slovakia.
Realistically it will be a long time, if ever, before a do-it-yourselfer can click on the bond tab of their broker's website and put $5000 into Indonesian bonds, $10,000 into Colombian and another $20,000 into bills from Singapore. With that understanding, the specialty funds become much more important. Quite possibly the only thing that US debt has going for it is that it is from the US. I do not think the US will default, they will just print enough to ensure that doesn't happen but when you consider all the stats there is not much of an investment case for US treasuries.If you disagree then you are a buyer of treasuries and if you agree you are looking for alternatives. Superior debt ratios, better growth prospects and better demographics all make for a pretty good starting point for picking sovereign debt from other countries.
One relevant anecdote that I have mentioned before; several years ago I was on a panel that included someone in the ETF business in Turkey. I asked him what the typical allocation is for Turkish market participants in domestic (that is Turkish) equities and said 15-20%. Whatever the characteristics of the Turkish market (intentionally vague), they are the same for everyone including people in Turkey. It is prudent for Turkish market participants to have a lot of foreign exposure.
The US is not Turkey. However the US is not modern day Norway either. The term for this topic is of course home bias. In hindsight the best thing for the last ten years would have been no US equity exposure (bonds did pretty well obviously). Personally I do not believe that US stocks will be down on the decade again but I do not think they will be relatively compelling either. Additionally, the prices of bonds are now very high and people are trying to guess how big the second round of quantitative easing will be (repeated from the other day). Maybe you will disagree but I think people need access like the funds proposed above.
6 comments:
Hi Roger--Speaking for myself, an important objective for my bond sleeve is protection of principal. I'm intrigued by products like these, but I also wonder how much risk they entail, relative to volatility in the $USD?
Thanks!
The thing that I think about is bubbles if these ETFs get too narrow. I mean, I don't see myself investing in a bond ETF that's too narrow, but I wonder if you'd see a situation where (I'll make something up) people see an opportunity in a Zimbabwe bond ETF, and you see people dump a couple billion dollars into that. Which is, of course, far more money than there are Zimbabwe bonds.
Not that I'm paranoid or anything.
anon, no real way to give a quantifiable answer to your question. Look at the forint's decline against the USD, that is a large drop and anyone caught the wrong way would have gotten pounded.
SD, your question boils down to understanding what you are buying. what is the totality of the dynamics of the market you are buying.
This is exactly how the ETF market should develop. Someday we should be able to move from asset class to asset class - either equity or fixed - using ETFs. As the ETF market matures, the liquidity and other issues will become less of a factor even for more esoteric holdings.
Regarding a US default, the works of Reinart and Rogoff present the possibility that we will default as will Japan, UK, and other countries where social programs will overwhelm government budgets. Monetization might be the course for a while, but that only goes so long before the markets repudiate the country. It will be interesting.
Interesting???
Yes, if they weren't screwing with your life as they mess things up
Apologies for a lengthy comment but there are a lot of wrinkles in this global debt mix. For example:
In a recent Vox piece, Rogoff and Reinhart summarize the study Kirk references thus: "The main findings ...are:
•First, the relationship between government debt and real GDP growth is weak for debt/GDP ratios below 90% of GDP. Above the threshold of 90%, median growth rates fall by 1%, and average growth falls considerably more. The threshold for public debt is similar in advanced and emerging economies and applies for both the post World War II period and as far back as the data permit (often well into the 1800s).
•Second, emerging markets face lower thresholds for total external debt (public and private) – which is usually denominated in a foreign currency. When total external debt reaches 60% of GDP, annual growth declines about 2%; for higher levels, growth rates are roughly cut in half.
•Third, there is no apparent contemporaneous link between inflation and public debt levels for the advanced countries as a group (some countries, such as the US, have experienced higher inflation when debt/GDP is high). The story is entirely different for emerging markets, where inflation rises sharply as debt increases.
Debt and growth causality
As discussed, we examine average and median growth and inflation rates contemporaneously with debt. Temporal causality tests are not part of the analysis. The application of many of the standard methods for establishing temporal precedence is complicated by the nonlinear relationship between growth and debt (more of this to follow) that we have alluded to.
But where do we place the evidence on causality? For low-to-moderate levels of debt there may or may not be one; the issue is an empirical one, which merits study. For high levels of debt the evidence points to bi-directional causality."
RW here:
First of all it takes a very carefully crafted set of tests to distinguish bi-directional causality from correlation and, as Rogoff and Reinhart freely state, they did not use those methods. Shorter version: The evidence from Rogoff and Reinhart also supports the far more straightforward reverse argument that economic contraction, lack of demand, causes revenue to fall and debt levels to rise so a higher debt/GDP ratio is simply a direct, arithmetic consequence; the mysterious 90% threshold is an artifact.
Second, as Rogoff and Reinhart note, emerging markets are much more sensitive to debt levels than developed countries, particularly when they face inflationary pressures. Any country that pegs its currency to the $USD is already under inflationary pressure and a flood of excess dollars would lead to hyperinflation in fairly short order because they would have to buy $USD denominated debt to sterilize their currency. If the Fed seriously starts another round of QE any and all $USD-pegged countries will watch their sovereign funds melt away like dew in the hot son.
Personally I think the Fed will blink before fostering a full-blown currency crisis but I don't particularly feel like betting the bank on it.
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