While the market’s main focus continues to be on yesterday’s Federal Open Market Committee (FOMC) comments and another move higher in U.S. interest rates, the spike in short-term lending rates in China has also been causing concern, according to Fran Rodilosso, Fixed Income Portfolio Manager at Market Vectors ETFs.
“Central bankers around the world all will eventually have to revisit the extraordinary measures taken over the last few years to support their economies,” says Rodilosso. “Fixed income investors are right to be concerned about the impact of higher rates on their portfolios. However, for the long running health of the economy and of borrowers, all investors should be hoping that the Fed sees both a need and a path to the exit from current monetary policy. When we think about credit markets, specifically high yield, we have been hoping for a world where rates move gradually towards, for lack of a better word, normalization. If 10-year U.S. Treasury yields are back at 1.5% at year end, I believe that would mean the U.S. is not growing, and likely mean that corporate earnings are not growing either,” Rodilosso added.
Rodilosso noted that the People’s Bank of China, the country’s central bank, has recently been reluctant to provide additional liquidity to the banking system. “This may only be a short-term phenomenon, and the effort to rein in rampant credit formation is a positive development, in my view. In the case of China, we are only talking about a temporary tactic right now and not a policy shift, but at least it is a sign that the People’s Bank has their eye on the ball,” Rodilosso said. “I think the really bad news would be if their effort to combat excesses, or that of the Fed to navigate the potentially inflationary consequences of its actions, comes too late.”
“If China is willing to accept lower growth, rather than rapid growth at any cost, I believe the long run outcome could be a lot better. But in the short-term, clearly the latest developments from China have weighed on most commodity prices and prices of emerging market assets as well. But the biggest factor impacting the markets that I focus on most closely – credit and emerging market debt – has obviously been Treasury bond volatility.”
Mr. Rodilosso has 20 years of experience trading and managing risk in fixed income investment strategies, including 17 years covering emerging markets. Among the Market Vectors ETFs under his watch are Emerging Markets Local Currency Bond ETF (NYSE Arca: EMLC), Treasury-Hedged High Yield Bond ETF (NYSE Arca: THHY), Emerging Markets High Yield Bond ETF (NYSE Arca: HYEM), Fallen Angel High Yield Bond ETF (NYSE Arca: ANGL), International High Yield Bond ETF (NYSE Arca: IHY), Investment Grade Floating Rate ETF (NYSE Arca: FLTR), LatAm Aggregate Bond ETF (NYSE Arca: BONO) and Renminbi Bond ETF (NYSE Arca: CHLC). As of March 31, 2013, the total assets for these ETFs amounted to approximately $1.9 billion.
About Market Vectors ETFs
Market Vectors exchange-traded products have been offered since 2006 and span many asset classes, including equities, fixed income (municipal and international bonds) and currency markets. The Market Vectors family totaled $26.1 billion in assets under management, making it the fifth largest ETP family in the U.S. and ninth largest worldwide as of March 31, 2013.
Market Vectors ETFs are sponsored by Van Eck Global. Founded in 1955, Van Eck Global was among the first U.S. money managers helping investors achieve greater diversification through global investing. Today, the firm continues this tradition by offering innovative, actively managed investment choices in hard assets, emerging markets, precious metals including gold, and other alternative asset classes. Van Eck Global has offices around the world and managed approximately $35 billion in investor assets as of March 31, 2013.
There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. Debt securities carry interest rate and credit risk. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. Credit risk is the risk of loss on an investment due to the deterioration of an issuer's financial health. The Funds' underlying securities may be subject to call risk, which may result in the Funds having to reinvest the proceeds at lower interest rates, resulting in a decline in the Funds' income.
The Funds may be subject to credit risk, interest rate risk and a greater risk of loss of income and principal than those holding higher rated securities. As the Funds may invest in securities denominated in foreign currencies and some of the income received by the Funds may be in foreign currency, changes in currency exchange rates may negatively impact the Funds’ returns. Investments in emerging markets securities are subject to elevated risks which include, among others, expropriation, confiscatory taxation, issues with repatriation of investment income, limitations of foreign ownership, political instability, armed conflict and social instability. Some Funds are subject to risks associated with investing in high-yield securities; which include a greater risk of loss of income and principal than funds holding higher-rated securities, as well as concentration risk; hedging risk; and short sale risk. Investors should be willing to accept a high degree of volatility and the potential of significant loss. The Funds may loan their securities, which may subject them to additional credit and counterparty risk. For a more complete description of these and other risks, please refer to the Funds’ prospectus and summary prospectus.
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Fund shares are not individually redeemable and will be issued and redeemed at their NAV only through certain authorized broker-dealers in large, specified blocks of shares called “creation units” and otherwise can be bought and sold only through exchange trading. Creation units are issued and redeemed principally in kind. Shares may trade at a premium or discount to their NAV in the secondary market.
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