Emerging markets on track to set sovereign debt record
Low rates tempt governments from Argentina to Saudi Arabia to issue bonds
by: Elaine Moore
A punishingly low yield environment for money managers has sparked a jump in demand for emerging market fixed debt in the past few months, as lack of inflation keeps interest rates in big economies on hold and prompts additional monetary easing from the European Central Bank, the Bank of Japan and the Bank of England.
In the US, weak jobs data published on Friday have also pushed back expectations of the Federal Reserve raising interest rates this month, potentially removing a threat to the buoyancy of emerging market assets.
Record inflows of funds have in turn pushed up emerging market bond prices, reducing borrowing costs down and spurring an increase in debt sales.
Inflows into EM fixed income have surpassed other risky assets in the past two months, with investors pouring over $16bn into emerging market bond funds since the UK voted for Brexit.
While inflows have headed primarily to dollar-denominated bonds, local currency bonds — which expose investors to both credit risk and currency moves — have also seen an uplift in demand.
Zsolt Papp, head of emerging markets debt at JPMorgan Asset Management, said there remained scope for continued investment in emerging markets in the coming months, noting that countries including India and Turkey had lowered interest rates recently and that more might follow.
However, analysts at Bank of America Merril Lynch pointed out that the risks of a pullback in bond prices remained high. Not only are emerging markets an unbalanced and highly diverse group, but falling oil prices and a shift in risk appetite could quickly result in a sell-off.