When the world’s largest bond fund reduces its holdings of U.S. government-related debt, the investment community should take heed. And when the same fund increases its allocation to emerging market debt to a record 11 percent, investors really need to stand up and take notice. That’s exactly what happened in July to Pimco’s Total Return Bond Fund, which manages $239 billion.

Pimco isn’t the only major player reducing holdings in U.S. government debt. The largest foreign holder of U.S. Treasurys, China, decreased its holdings for the second straight month. They fell $24 billion, or 2.7 percent, to $843 billion.

The diminishing appetite for U.S. Treasurys due to historically low interest rates is a story to watch closely for two reasons. First, it will lead to higher interest rates in the U.S. to simply attract money back into Treasurys. Secondly, bonds issued by other countries, particular those in emerging markets that offer higher yields, will be in higher demand.

And, in case you were worried I’d taken too long to get to the point, plenty of ETFs are available to play the rising emerging markets as well as a U.S. Treasurys bubble that may be ready to burst before long.

U.S. Treasury Bubble Creates Emerging Market Opportunity

The PowerShares Emerging Markets Sovereign Debt fund (NYSEArca: PCY) tracks a portfolio of liquid emerging markets U.S. dollar-denominated government bonds.

The ETF currently comprises bonds from 22 countries with the largest allocation a mere 5 percent. The diversification offered by PCY, which lowers any country-specific risk, has been the main reason I own the ETF for clients. The Philippines, Brazil, Colombia, El Salvador and Pakistan are the top five countries. Over the last year, the ETF has rallied 12 percent and recently hit an all-time high. And that’s not including the current dividend yield of 6.4 percent.

The iShares JPMorgan USD Emerging Markets Bond ETF (NYSEArca: EMB) is composed of 65 individual bonds with the top five countries making up 41 percent of the allocation—obviously not quite as diversified as PCY.

Russia, Brazil, Mexico, Turkey and the Philippines make up that 41 percent. The yield is currently 5.7 percent and the ETF is up 14 percent in the last year. The expense ratio is slightly higher—0.60 percent vs. 0.50 percent for PCY.

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