Borrowing Bonanza in Emerging Markets

Hunt for yield has let risky governments to sell lots of debt at low yields

By Anjani Trivedi

A decade of loose monetary policy from the Federal Reserve has sent gushers of cash to emerging markets. One big impact has been to reduce funding costs for a host of riskier, first-time borrowers such as Maldives and Tajikistan and those that haven’t issued in a while such as junk-rated Iraq and Jordan. Bonds of these countries are often illiquid, and tough to sell when investors want to—or even have to. Yet foreign-currency issuance among emerging markets governments and companies is at a record.

U.S. dollar-denominated bond issuance by emerging market companies and countries

Issuance of U.S. dollar-denominated bonds by emerging-market companies and countries

Despite all that new debt, investors are receiving very little in return. The premium investors gain for emerging markets risk has shrunk to the lowest level since the financial crisis. Yields have been rising though, with India’s government debt rising above 7% last week to the highest level since September 2016 and China’s benchmark 10-year-yield jumping to a three-year high.

Premiun investors demand to hold BBB-rated U.S. dollar emerging-market bonds over U.S. Treasuries

One sign that stresses may be lurking: two assets that move in tandem based on how economies are performing, emerging market dollar bonds and currencies, no longer do. The correlation between the two is at its lowest in 15 years, according to Goldman Sachs. Such a breakdown often precedes or coincides with market routs.

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