Investors exit EM bond ETFs ahead of US election volatility

Investors yanked money from exchange-traded funds that buy emerging-market bonds in October as traders reduced risk ahead of the high-stakes US election on Tuesday, the outcome of which remains a coin toss. 

The $14.8 billion iShares J.P. Morgan USD Emerging Markets Bond ETF, known by its ticker EMB, recorded $732 million in outflows in October alone, the biggest monthly loss since March, according to data compiled by Bloomberg. The Invesco Emerging Markets Sovereign Debt ETF, known by its ticker PCY, also saw outflows totaling $78 million. 

For Brendan McKenna, an emerging markets economist and foreign-exchange strategist at Wells Fargo, risks for emerging-market debt have piled up recently. 

“The Fed may not be easing as quickly as markets originally expected, China stimulus has been underwhelming, and at least before this weekend, Trump had a lot of momentum which could have been a de-risk type of development,” McKenna said. “When those risks build and valuations are expensive, outflows usually follow.”

Across EM debt, spreads are “very tight,” which could also signal that traders are taking some profits, he added.

The extra yield investors demand to own the dollar debt of emerging-market governments rather than Treasuries fell 23 basis points to around 337 basis points in October, its third straight monthly decline, according to a JPMorgan Chase & Co index.

As markets embark on a volatile week ahead of US elections, most major polls show Trump and Harris locked in a tight race. 

In recent weeks, investors have been betting on a Trump win, positioning for his low-tax and high-tariff policies to boost both growth and inflation. That could ultimately lead the Federal Reserve to cut its key interest rate by less than what is currently priced in.

Those bets helped boost the dollar gauge to a four-month high last week and sent yields on 30-year Treasuries to their highest since July, creating a steeper yield curve. Still, traders are now reassessing their bets on Trump returning to the White House after weekend polls indicated Harris was gaining ground across key swing states.

Amid a busy week for investors, which also features several rate decisions across global markets — including the Fed on Thursday — traders are looking to reduce their risk profile to protect their portfolios, according to Todd Rosenbluth, head of research at TMX VettaFi.