• Weaker domestic inflation and lower dollar tailwinds for international fixed income
  • Emerging market bonds have rallied sharply off their October low
  • Continuation likely, but gains could be capped 

The bond market might be fixing itself. Last week, the iShares iBoxx High Yield corporate bond fund (NYSE:) recorded another strong net inflow. The junk-bond ETF now paces for its second-biggest monthly net inflow since the fund’s inception. This comes as interest rates have cooled and breakeven inflation expectations have leveled off. 

Risk On: Domestic High-Yield Bonds Enjoy Big November Inflows

HYG Monthly Flows

Source: Bloomberg

Over the past month, U.S. Treasuries are up about 2% while corporate credit also features significant buying interest. The iShares iBoxx $ Inv Grade Corporate Bond ETF (NYSE:) sports a total return of 6.5% while riskier high-yield debt, as measured by HYG is positive by 2%. The duration of LQD is much higher compared to HYG, so the recent drop in intermediate-term interest rates has been particularly beneficial for high-grade corporates. What is very green on the one-month ETF performance heat map below is price action in emerging market bonds. 

One-Month Performance Heat Map: EMB Shines Among Fixed Income

Source: Finviz

The iShares J.P. Morgan USD Emerging Markets Bond ETF (NASDAQ:) is higher by 7%, including dividends. A weakening provides an extra tailwind for foreign fixed income—especially EM debt. Callum Thomas at Topdown Charts always brings strong analysis combining technicals and the macro. He found that there is a bearish divergence between a recent new high in yields and the number of EM nations that are making new highs in yields—it is a telltale sign that the uptrend in emerging market rates could be in real jeopardy. (Which would be bullish EM bond prices.) 

Bearish Yield Divergence: Bullish for EMB Prices

Source: Topdown Charts

Let’s dig into where EMB might go from here given this potentially bullish omen seen in the macro data. I zoomed out to the past 10 years using weekly candles on EMB. You can see how steep the drop from the peak more than a year ago has been. EMB plunged by nearly a third, shooting right through the COVID low. After a more than 10% advance off the October nadir, the fund is still $6 shy of its 50-week moving average. 

I assert the ETF has further upside but might find some resistance just above $90—the August 2022 rebound high and where the falling 50-week moving average will come into play. The $91 level has more resistance confluence as the 38.2% Fibonacci retracement is seen there. 

Notice, too, that there was a modest bullish divergence on the weekly RSI between the low in price this past July and the all-time low notched in mid-October. The RSI figure did not confirm a new low last month. So, there are some indications that the current bounce might have some legs. 

EMB: Bullish Divergence, More Space to the Upside

EMB ETF Daily

Source: Stockcharts.com

The Bottom Line

As yields retreat amid easing inflation fears and a lower US dollar, emerging market debt has been a big beneficiary. I see more upside ahead, but gains could be capped by three key spots of resistance in the low $90s.

Disclaimer: Mike Zaccardi does not own any of the securities mentioned in this article. 

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