Having warned that 
Emerging Market debt risks had hit 10-year lows (despite soaring uncertainty) and EM equity risk had hit record lows (amid record inflows), it seems the lagged impact of the collapse in the China credit impulse is finally being recognized as the largest EM Debt ETF (from JPMorgan) just suffered its largest outflows in history…

As a reminder, in the run-up to this dumping of EM assets, expected uncertainty in Emerging Market Equities has never been lower… (in fact EEM implied vol is now less than half its lifetime average of 29.7%)

What was even more stunning than investors’ tolerance for these risky issuers is how little compensation they’re demanding in return.  Emerging Market bonds were pricing in the least ‘risk’ since Dec 2007…

The disconnect is a result of historically low-interest rates worldwide — notes in Japan, Germany and France have negative yields — as well as what skeptics see as investors’ complacency as they pour into index-based funds without scrutinizing their holdings.

“I’m guessing the alarm bells are ringing, and in many ways it feels like 2007,” said Anders Faergemann, a senior fund manager in London at PineBridge Investments, which oversees about $80 billion globally.

“Dedicated EM investors are dancing ever closer to the exit door, but for those of us who were around in 2007 there was a long period in which EM continued to rally even though valuations were stretched.”

However, as Bloomberg notes, the Federal Reserve’s hawkish posture last week sets the stage for an uptick in developing-nation volatility in the second half of the year, Bank of America Merrill Lynch strategists said.

And then there is the lagged effect of the collapse in China’s credit impulse – set to send volatility and risk spreads higher…