hdas wrote: ↑
Fri Oct 11, 2019 1:37 pm
nisiprius wrote: ↑
Mon Oct 07, 2019 5:24 pm
They have been high-risk, high return. They haven't been bond-like at all. Some people will always be attracted by high return. I think the view of emerging market bonds is colored by the fact that it is now more than 10 years since this
happened, and most emerging market bond funds are less than ten years old... and those that are more than ten years old aren't required to include this time period in the standard descriptive materials, and usually don't.
This is Fidelity's emerging markets bond fund, FNMIX. That's a -40% loss, in a "bond" fund. The recovery was quick, the return since then has been good as you can see by clicking on "source" and picking "max," and some people are convinced this was a one-time event that couldn't possibly recur. But. -40%.
This take is the analogue of showing the drawdown of bonds in the 70's and quickly concluding bonds are not good for your portfolio. Cheers
You are reasoning by false analogy, I think.
What nisiprius is trying to show is that EM bonds show behaviour which is quite equity like - extreme volatility during a crisis. He could also have shown you 1994 (Mexico Crash) or 2008 (when EM bonds went down, US Treasuries went up) or indeed 1982 (?) and the Mexico crash then. Or 1929 when what we would now call EM bonds also went into a downward spiral (a number of countries defaulted during the 1930s).
1970s? Bonds were a bad investment. In the years when interest rates were jacked up to 21% (1981-82) bonds did very badly.
But to say bonds have interest rate risk (the latter example) and inflation risk (returns lagged inflation in the late 1960s & 70s) is simply to state that bonds have known risks against those 2 macroeconomic factors. All bonds. Because they are fixed payment instruments (generally).
But what's going on here with EM bonds is a susceptibility to credit risk and to contagion
. Although we have had situations like Argentina where the default is very much seen to be an Argentine issue and localised to that country (I think) we have also had situations like 1998 where the rout in EM bonds (& stocks) was general. It did not stop at Thailand nor Indonesia but went on- South Korea, Brasil and finally Russia. Had the liquidation of Long Term Capital Management hedge fund not been orderly, then it could have got a lot worse.
Similarly in 2008 although the debt crisis was a developed market thing, I don't think the bonds of EM countries were, generally, a safe haven.
I would make analogies of US Treasuries vs. High Yield/ junk bonds. The latter have significant equity risk (closely correlated with credit risk) and do poorly at times of financial crisis (the really bad crash in 1990 was partly technical, Michael Milliken's prosecution & the subsequent collapse of Drexel Burnham Lambert; 2008-09 showed just how risky these things are in a general downturn).
So that's nisiprius' message to investors. Do not expect your EM bonds to behave like US Treasuries, or Japanese government bonds, or the stronger countries of the Eurozone bonds, or Swiss government bonds, or even UK gilts. They will show more risk than that and it will probably show up at what are generally bad times in markets.