Bullish on Global Bonds

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

While the Nasdaq edged up 0.3%, the Dow fell 0.9% and the S&P 500 lost 0.7%. In the meantime, the MSCI Emerging Markets Index ended the week 0.8% higher.

The better news is that your Global Bull Market Alert portfolio outperformed the broader markets substantially. The iShares MSCI Chile Investable Mkt Idx (ECH) and MSCI Thailand Investable Market Index Fund (THD) both hit record highs. And Global X/InterBolsa FTSE Colombia 20 ETF (GXG) and the Market Vectors Indonesia ETF (IDX) also rose by 2.57% and 3%, respectively.

The U.S. dollar also rallied, rising to a six-week high against the euro, after a European Central Bank official suggested monetary policy should remain loose until next year. This was positive for last week’s pick, the UltraShort Euro ProShares (EUO), which ended the week 2.1% higher.

This week’s Global Bull Market Alert pick focuses on a new asset class — sovereign or government debt — through the iShares JPMorgan USD Emerging Markets Bond (EMB).

Emerging market bonds have taken off in 2010 and are poised to be one of the best-performing asset classes of the year. While yields on U.S. Treasuries are plummeting, emerging markets bonds are becoming ever more attractive. In today’s topsy-turvy world, many emerging markets actually have better balance sheets and are more capable of repaying debts than some of their more heavily indebted counterparts in the developed world. A handful of sovereign emerging market bonds pay coupons in excess of 10% (in U.S. dollars), compared to 4% and under for many government bond ETFs. JPMorgan’s latest investor survey appears to confirm newfound interest in emerging market bonds. They expect already record inflows to emerging market debt to pick up further to a total of $70-$75 billion in 2010.

The iShares JPMorgan USD Emerging Markets Bond (EMB) follows the JPMorgan EMBI Global Core Index, a benchmark designed to track the total return of a U.S. dollar-denominated emerging markets debt benchmark. EMB holds 57 different securities, and the average credit rating of its securities is BBB- at the edge of investment grade. EMB’s yield is about 5.7% and it is up 12.97% so far this year — outperforming all but the top-performing global stock markets of 2010.

EMB also serves as a defensive position in your portfolio that will act as a relatively low volatility hedge against sharp downturns in global stock markets.

So buy the iShares JPMorgan USD Emerging Markets Bond (EMB) at market today, and place your stop at $109.25. There are no options on this one.

Portfolio Update

iShares MSCI Chile Investable Mkt Idx (ECH) hit a record high of $67.78 last Tuesday, ending the week 3.2% higher. With Chile’s government announcing that the country’s gross domestic product (GDP) in the second quarter rose 6.5% from the same period last year, ECH is a BUY.

UltraShort Euro ProShares (EUO) ended the week up 2.1% as the U.S. dollar hit a six-week high against the euro. With markets edgy and Europe still challenged by the problems of Greece and Ireland, EUO remains a BUY.

iShares FTSE/Xinhua China 25 Index (FXI) was flat this week, and continues to be among the weakest emerging markets. This position remains a SELL SHORT.

Global X/InterBolsa FTSE Colombia 20 ETF (GXG) rose 2.57% last week. With the nation’s 12-month inflation rate of nearly 2% and the central bank likely to maintain its current benchmark lending rate of 3%, GXG is back to a BUY.

Market Vectors Indonesia ETF (IDX) jumped 3% this past week, closing the week back near record highs. The “Next BRIC” remains a BUY.

Itaú Unibanco Holding S.A. (ITUB) ended the week flat. The company’s CEO announced this week that ITUB will be looking to expand into other markets in Latin America to fuel its growth. With Brazil’s market slightly on the edge, however, ITUB remains a temporary HOLD.

iShares MSCI Thailand Investable Market Index Fund (THD) jumped an eye-popping 5.8% last week, hitting a record high. This ETF is benefiting from some serious momentum. THD remains a BUY. Raise your stop to $51.00.

P.S. If you want to keep up with my latest insights on developments in fast-paced global markets, you can now follow me on Twitter on @NickVardy or on my new blog, NickVardy.com.

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