G3 Central Banks have disfigured the market's pricing mechanism to such a degree that talk of "overvaluation" is misplaced: "overvalued" relative to what? Keep buying.

1. 12-MONTH HIGHS

   Today's Financial Times (FT) points out on page 18 that " Over the past six weeks a record $18 bn has flooded into emerging market (EM) debt funds... BofAML describes this as the big 'inflection point in EM debt flows', a run that marks a turning point from the three year period from early 2013 to 2016, during which more than $100 bn poured out of the asset class, halving its holdings." The FT journalist puts forth three reasons for this rally in emerging markets (EM) bond prices.

2. LOWER  G3  POLICY YIELDS

   Indeed, I posit that it is Central Bank prevarication in the West that has driven yields so low, making EMs' all the more attractive. You know that the low developed market yields make those higher yields in EMs attractive.

3. WEAK DOLLAR

   We all know that the dollar has been falling because of Fed prevarication and some mixed US economic signals. So, EM currencies have gained, making their junk bonds ("bonds") attractive as they can be bought on the cheap by US dollar investors.

4. COMMODITY PRICES

   Renewed talk of an agreement to cap oil production has pushed crude prices towards $50/barrel, providing another reason for investor optimism over EMs." Given this year's switch from a heftily wet El Nino to a parchingly dry La Nina means that agricultural prices have to rise, too. Obviously, higher commodity prices favour EMs as an asset class.

5. HIGH YIELD  BONDS OVERVALUED?

   Given that a not small portion of EM private sector debt is of "junk" nature: are junk bonds and high yielders in general overvalued? 

6. G3 CENTRAL BANKS ARE DISFIGURING THE MARKET'S PRICING MECHANISM

   Within the framework of our Economic Clock®, G3 Central Banks have been creating an "excess supply of money" for years, as we all know. Actions on the short end of the curve (pumping in liquidity) and on the long end of the curve (Quantitative Easing) have distorted the market's pricing mechanism to such a degree that now, 18% of the world's yield comes from US junk bonds  - even though  these account for a mere 4% of the total bond market (source: that same FT, p. 20) !

7. THE MYTH OF VALUATION

   Given that the Central Banks have ruined the pricing mechanism, you cannot seriously compare today's disfigured valuations with those of years past, when the market priced assets...

8. MY GUESS

   is that the spread on junk bonds vs G3 government bonds will keep narrowing on account of yield-hungry high demand for junk and low issuance thereof. Besides, I see no end to continue G3 easing of the monetary taps, esp. in Japan and the EU.  Thus, junk bond prices will keep rising.

9. CRASH IN JUNK

   This will occur due to some external event such as a crash in America's largest debt market: cars, or in student loans. 

10. INVESTMENT IMPLICATION

    So keep buying junk, you yield-hungry folks. They don't seem to be over-valued, as this implies a market-driven benchmark against which to value assets. Instead, the G3's intransigent  politicians have forced their Central Banks to disfigure the market's pricing mechanism - by creating that excess supply of money. So asset price inflation continues. Buy.