Fears of bubble in EM debt grow
Record debt issuance for Asia and ever-falling emerging market bond yields prompt some to say the rally is too good to last
Fears are growing of a bubble in emerging market debt as record lower-rated issuance and unstoppable capital inflows dominate the market.
As yesterdays Emerging Markets reported, high-yield bond issuance in Asia so far this year has already trebled the full-year total for 2012 to meet the demands of investors hungry for yield.
This ardour, though, is worrying some investors who fear a bubble in emerging market (EM) debt. Im told Ukraine has seen the issuance of 10 corporate dollar bonds so far this year, Rwandas 10-year debut bond came in below 7% yield despite its single B rating, and Nigerias 2021 dollar bond yields 4%, said Charles Robertson, global chief economist at Renaissance Capital. What we are now getting very close to is a local currency bond bubble too.
For example, Robertson said that local bond flows into Turkey were $223 million in January to February 2012, and in January to February 2013, $4.53 billion a 20-fold increase in a year. Russian foreign ownership of the local bond market had boomed from almost nothing to 15% within a year, he added, while the yield on the local 10-year bond had dropped to 6.7% in a country with headline inflation at around 7%. But foreign ownership [in Russia] could double again, he said.
Debt capital market bankers in Asia are split over their views on a market bubble. What constitutes a bubble? said one. Unreasonable valuations and excessive speculative capital? I wouldnt say I see evidence of that.
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A separate RBS report, authored by analyst Erik Lueth, argued last month that emerging market 10-year sovereign bonds were overvalued by 5% on average.
In a recent note to clients, Capital Economics economist Paul Hollingsworth said he expected renewed pressure on dollar-denominated emerging market government bonds because they were vulnerable to a curbing of quantitative easing, concerns about valuations, and increasingly fragile outlooks for near-term economic growth in emerging markets. But he added: Despite these three factors, we dont expect any sell-off in dollar denominated EM bonds to be dramatic.
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