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Tourist money is feeding a CEEMEA bond bonanza, but crossover buyers’ renascent love for EM brings many red flags

BREAKFASY AT TIFFANYS 1961 Paramount film with Audrey Hepburn. Image shot 1961. Exact date unknown.

CEEMEA bonds have been on a tear this year, with record volumes printed, and Poland’s $8bn triple trancher the latest deal to underline the enthusiasm. But EM bond funds are still leaking cash, so who exactly is tucking into the bond banquet?

The answer, say several syndicate managers, is that the tourist money is back. Crossover investors, who had fled the asset class in the last two years as US rates rose and wars were waged in Ukraine and the Middle East, have returned.

Across global credit, EM was one of the slower asset classes to rally on the back a more benign US rates outlook since late last year. Today, therefore, it looks cheap versus the rest of the world.

This, together with an unusually hefty year for EM maturities, accounts for why developing market new issues are flying off the shelves — especially high grade names like Poland — despite EM bond fund flows standing at negative $6.3bn year to date.

Yet crossover money is a blessing and a curse for dedicated EM investors. While they welcome it supporting bond prices, especially while they are struggling to buy, longer term it can cause problems and volatility. Crossover money, by definition, is fickle.

EM issuers are right to grab it while it is there. The demand will eventually fade naturally and may even reverse, which could happen slowly or quickly.

Although the hope is that any exit is gradual, it is often not the case. In the event of a sudden shock to EM, this hot money’s lack of longer term commitment to the asset class means it would inevitably leave fast.

Herein lies the danger. As we have seen so many times before, if there is a rush to the door, many get trampled.

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