Investors are blowing up a corporate bond bubble. But “the relentless search for income”, says Justin Oliver of Collins Stewart, is also spilling into emerging-market debt and stoking fears of irrational exuberance there too. Yields on mainstream emerging-market debt are now very low – the Philippines, for instance, launched a two-year bond with a 2.3% coupon in January. So investors are sizing up riskier markets.
The yield on JPMorgan’s Nexgem index of exotic government bonds has fallen from 20% in the financial crisis to under 6%. “This is a crazy market where people will lend to anyone,” a senior analyst complains to the FT’s Robin Wigglesworth.
Bolivia, for instance, launched a ten-year bond yielding 4.8% last October. Yet four months before, troops had been deployed in the capital to thwart a police mutiny, notes Rob St. George on Whatinvestment.co.uk. Countries that have issued debt for the first time over the past few years are hardly all paragons of economic virtue: they include Belarus, Albania and Honduras.
The problem isn’t merely that investors aren’t being compensated for the risk: many of these markets are illiquid and funds may thus have trouble selling out of them once sentiment turns and widespread selling begins. As one trader puts it, “it’s going to end in tears at some point”.