Global investors are bingeing on emerging-market debt. In the first six months, governments in emerging and frontier markets have borrowed record sums. International sovereign bond sales hit $69.5bn in the first six months of 2014, up 54% on last year. Some of this just reflects improving fundamentals in the developing world, which have allowed several countries to borrow on global markets for the first time.
However, “the quality of the issuance is deteriorating, and that is something to worry about”, says Bhanu Baweja of UBS. Historically low interest rates have pushed investors to hunt down yield where they can get it. Mexico, Turkey, Brazil and Russia have been able to borrow at rates similar to Western nations as bond prices have soared. In the eurozone, troubled economies such as Greece, Cyprus and Spain have all issued debt at low rates too.
Meanwhile, Kenya has set a record for the biggest African sovereign bond debut, while Belarus and Honduras, hardly the most stable of states, have tapped markets for the first time in the past two years. Investors should beware that this irrational exuberance could result in a nasty hangover amid the rush for the exit when Western interest rates rise and money pulls out of emerging markets.