Diary of a Financier

Closed Trade: Long EEM, Short EMB

In Capital Markets on Thu 6 Jan 2011 at 15:44
  • Closed Emerging Market pair trade: Long EEM, Short EMB.
  • Net Return: +4.83% since 11/05/2010.

I attributed fundamental and technical evidence in support of this long Emerging Markets Equities (EEM), short Emerging Market Bonds (EMB) pair.  EMB was slipping as we entered November.  To me, the separation confirmed inflation anxiety at that time.  I wrote one client:

I’ve noticed a divergence in Emerging Markets, with bonds starting to underperform equities.  I read that as an inflation signal for these countries—which meshes nicely with the notion that a punished US Dollar is exporting hot money to developing economies a la 1997.  While governments are taking steps to control the hot money, a policy lag plus the overwhelming QE2 stimulant leave us an opportunity to profit from the erosion in the real value of fixed income relative to equities.

Maybe on the verge of a correction, EEM is turning over now (see my 2011 Outlook), so I’m closing down this trade.

–Romeo

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  1. […] a holding without a relative-strength-paired long as protection.  Even though I’ve been spot-on this Emerging Markets inflation & underperformance du jour, I really don’t care to […]

  2. […] caught emerging market inflation right on the turnbuckle of EMB declines back in 4q10, then added a long/short pair of EMB/EEM in November.  I closed that pair per my 2011 Outlook, which also […]

  3. […] that I rode this same trade on the same [reflationary] premise last year between November 5, 2010 and January 6, 2011.  I’m particularly fond of the […]

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