The Least Explicable Bubble Of All

Tyler Durden's picture

Authored by John Rubino via,

Of all the mini-bubbles now inflating out there, maybe the least explicable is the race among emerging market companies to borrow dollars. This has gotten them – and their governments — in huge trouble so many times in the past (see the Mexican default of 1982 and the the Asian contagion of 1997) that you’d think dollar debt would be kind of a hot stove thing for Brazilians and Mexicans.

But no, they’re back at it:

Emerging-Market Companies Shrug Off Trump in U.S. Debt Binge

(Bloomberg) – Emerging-market companies are showing up to the U.S. debt market at the fastest pace ever, and finding plenty of appetite for their bonds.


Sales of dollar-denominated notes have climbed to about $160 billion this year, more than double offerings at this point in 2016 and the fastest annual start on record, according to data compiled by Bloomberg going back to 1999. Emerging-market assets tanked after Donald Trump’s surprise election in November, but they’ve quickly recovered, with bonds returning 4 percent this year and outperforming U.S. investment-grade and high-yield debt.



The deluge of issuance began when companies anticipating a surge in borrowing costs amid economic stimulus from Trump rushed to sell notes before his inauguration Jan. 20. But the expected jump never materialized, extending the window for companies like Petroleo Brasileiro SA and Petroleos Mexicanos to pursue multi-billion-dollar deals. They found plenty of demand from investors keen to buy shorter-dated debt that’s better insulated against rising U.S. interest rates.


Jean-Dominique Butikofer, the head of emerging markets for fixed income at Voya Investment Management in Atlanta, said he’s seen new interest in emerging markets from investors who already own U.S. high-yield bonds or emerging market sovereign debt that’s more vulnerable to rising interest rates.


“You want to be less sensitive to U.S. rates, but you still want to diversify and you still want to play the EM catch-up growth story,” said Butikofer, whose firm manages $217 billion. “You’re going to gradually add emerging-market corporates.”


The investable universe for emerging-market corporate debt is small, but growing quickly, with about $426 billion outstanding, according to Bloomberg Barclays Index data. That’s less than a tenth of the size of the U.S. investment-grade credit market. The notes have an average maturity of 6.3 years, compared with 10.8 years for investment-grade debt.


Economic Shift


Developing nations now rely less on exporting their goods to the U.S. and more on local consumption than in previous says, said Samy Muaddi, a Baltimore-based money manager at T. Rowe Price Group Inc., which oversees $862 billion.


“The EM growth model has really shifted in the last 10 to 20 years,” Muaddi said. “Consumption has risen as a share of GDP in many of the countries we’re involved in. That growth driver is pretty durable irrespective of U.S. policy.”


Debt from Indonesia, Argentina and Brazil is particularly attractive as those countries implement economic reforms, Muaddi said. While Trump’s trade policies may be bad news for Mexican companies if he scraps the North American Free Trade Agreement, he said many of the world’s biggest geopolitical risks are in developed markets — think Britain’s negotiations to leave the European Union or France’s election outcome. That’s upending the usual dynamic in which emerging markets are considered less stable.


Risks still remain. A surge in the greenback could spell bad news for emerging-market companies with lots of dollar debt and revenue mostly in a local currency. The overseas debt binge has boosted their total foreign corporate debt due in the next five years to $1.58 trillion, according to the Institute of International Finance. About 80 percent of that is dollar denominated.


‘Original Sin’


That could cause problems, according to Ricardo Hausmann, the director of the Center for International Development at Harvard University in Cambridge, Massachusetts.


While developing nations and their companies aren’t as dependent on overseas debt as they were in the 1980s — when a similar pattern sparked a wave of defaults in Latin America — a rising dollar “will make it that much harder for companies and sovereigns with ‘original sin’ to pay,” Hausmann said. He coined the term in reference to developing countries’ reliance on overseas debt in an article for Foreign Policy magazine almost two decades ago.


Investors seem unconcerned. They’ve poured $1.9 billion into mutual funds that purchase emerging-market debt denominated in dollars and other major currencies, according to data provider EPFR Global. The few exchange-traded funds that buy up the bonds have also had inflows of more than $200 million, Bloomberg data show.


“There has been a lot of supply, but it’s been absorbed very well by the market,” said Daniel Senecal, a credit analyst at Newfleet Asset Management in Hartford, Connecticut, which manages $12 billion.

So…emerging market debt is a great way to diversify because these countries are no longer export-dependent, thus “insulating” them from the risk of rising US interest rates. Furthermore, the developed world is where all the geopolitical risk now resides, so Brazil, Mexico (and Indonesia and Argentina!) have become safe havens.

If this seems to stretch the bounds of credulity, that’s because peak bubble rationales always do. In 1999 tech company earnings were “optional” and eyeballs were all that mattered. In 2006 home prices always went up so any price was a good price.

With today’s multiple bubbles such nonsense is everywhere. A college degree is worth millions over a lifetime so at a borrowed quarter-mil it’s a bargain. Modern cars will last decades so a 7-year auto mortgage is the best way to buy – especially if you have bad credit. Trump’s tax cuts will boost corporate profits without unduly increasing the deficit, so stocks at historically-high valuations are actually cheap.

But again, the craziest rationale has to be that since Latin American economies are now driven by local consumers, dollar-denominated debt is the best way for an Argentine copper miner to finance its expansion.

Here’s a quick scenario to ponder: The US blunders into another Middle-East war (or a stock market crash or unexpected slowdown when the auto, housing and student loan bubbles burst simultaneously) sending terrified capital pouring into Treasury bonds and pushing up the dollar.

That cheap emerging market dollar-denominated debt becomes 30% – 50% more expensive, causing a wave of borrowers to implode. And once again shell-shocked buyers of insanely-overvalued assets look back on their delusions and wonder what they were thinking.

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junction's picture

Face the facts, everything is going into the crapper. And wherever you go, someone is watching or keeping tabs on you, as shown by the Circa article on NSA spying approved by Obama.  I’d like to see the NSA reports on murdered DNC staffer Seth Rich and what the NSA had on actor Paul Walker before his Porsche went out of control (just like JFK Jr.’s plane, which suddenly crashed in clear weather on its approach to Martha’s Vineyard).  But everything is good as long as Apple can keep its over $250 billion in overseas corporate profits (mush of it made using slave labor) safe from taxation and the FATCA law that only applies to us peasants.         


During his final year in office, President Obama's team significantly expanded efforts to search National Security Agency intercepts for information about Americans, distributing thousands of intelligence reports across government with the unredacted names of U.S. residents during the midst of a divisive 2016 presidential election.


The Vault 7 "DarkMatter" documentation looks at CIA projects that infect Apple's Mac product line at the firmware level, basically meaning that the infection persists even if the owner of the computer reloads the operating system.  The documents explain the process and techniques that members of the CIA's Embedded Development Branch use to ensure that the CIA's "fun and games malware" are persistent.

Seasmoke's picture

I don't think it was a clear day when JFK Jr's crashed. 

JRobby's picture

Refer to Einstein's definition of insanity, once again.........

junction's picture

As first reported by United Press International, John F. Kennedy Jr. on approach to Martha's Vineyard in 8 mile visibility, was in radio contact with the ground, calmly informing them of his intentions to drop off a passenger before proceeding to Hyannis airport. Then, according to ABC News, JFK Jr's plane went into a steep dive, and crashed.

Read more: John F. Kennedy Jr.: Evidence Of A Cover up | WHAT REALLY HAPPENED

JRobby's picture

They are pretty serious about having some advanced warning on the civil war that is starting to happen.

ToSoft4Truth's picture

You don't use the fingerprint or iris scanner to unlock your cell phone, do you? 

Quantum Bunk's picture

The USD has been a risk asset since August of 2016. The USD represents the biggest dual deficit situation of all time. These EM's are the dual creditors now. Unlike the 80's or 97. Thailand had a dual deficit in 97. Now they all have dual surpluses and big forex reserves.

BorisTheBlade's picture

So, could it for example be China who is now providing dollar funding to EMs? If they were chasing yield, that would totally make sense.

LawsofPhysics's picture

"The USD has been a risk asset since August of 1971" -- Fixed it for you.

PrivetHedge's picture

I'd argue from 1913, Treasury dollars were good, Federal Reserve dollars are just a way to steal a nations wealth. Which it has done.

Lady Jessica's picture

The FED would say: we painfully telegraphed our rate hike intentions so you've only yourselves to blame.

Talk about beggar thy neighbour.

LawsofPhysics's picture

Allow me to simplify this for all you over educated useless paper pushers...

"Full Faith and Credit"

Consuelo's picture



"Here’s a quick scenario to ponder: The US blunders into another Middle-East war (or a stock market crash or unexpected slowdown when the auto, housing and student loan bubbles burst simultaneously) sending terrified capital pouring into Treasury bonds and pushing up the dollar."


The problem I see here is this 'scenario' is way long in the tooth, having been the go-to scenario-of-choice for the past 10 years now, and assumes that the world at large has been in a stand-still with regard changes in their own systems of $$$/¥¥¥trade...    

They haven't.    And those changes will prove the 'Up jumps the Devil' moment for the $USD complex.    

What's that saying - 'the beat-down won't be advertised'...?

LawsofPhysics's picture

Maybe, show us that "gold-backed Yuan" motherfuckers...

Until then, it's ALL bullshit...

Mike in GA's picture

This is far from inexplicable when you acknowledge the fact that the Greenspan put eliminated risk as a factor.  Draghi and Yellen keep the put going globally.

 There is no way out of a bubble except the inevitable bust.  Till then, the USD remains the cleanest dirty shirt and we must print to meet demand.  

After all, what's in your wallet?

LawsofPhysics's picture

"After all, what's in your wallet?"--


Depends where you are and what you are buying/paying for doesn't it?

Interesting times!

DisorderlyConduct's picture

This seems to be no mystery at all.

I once worked for a hotel chain. We had a set of properties we wanted to finance. We approached a lender for financing on one, then another, then a third property. We maintained the loans well for six months. Then we said let's consolidate. And while you're at it, add in these other three properties. When we were done they were sitting on $112M of property. We then didn't pay another dime. Later we had them settle for like $80M. What were they going to do - manage the hotels? Good money back in the day. I left the place when I found out.

My point is that a debtor is only valuable to the lender for as long as they pay back what is lent. The lender however is valuable to the debtor for as long as they keep lending more. There is a gap between the two extremes where a debtor, knowing they don't intend to pay, has the upper hand. Especially if the lender is thinking that their return will be unusually good or if the lender is in so deep that they dare not let the debtor fail. It's the same as a Texas holdem player that bets kings to the river with trips showing. Good money after bad until it's too late.

junction's picture

You weren't working for Donald Trump, were you?

DisorderlyConduct's picture

LOL. Nope. But the guy did make a run for govenor, which should tell you a lot about people that seek high office. All of them.

taketheredpill's picture



Nothing more than Yield-starved investors looking for any source of additional spread.  The EM debt becomes more attractive based in US$ since there's no need to worry about EM fx volatility when all you want is the spread.

This "strategy" will probably fail around the same time the herd tries to dump the HY etfs all at once.


Houses Depreciate's picture

Get interest rates back to long term trend, 10-12% and the problem is solved.

nostromo17's picture

What's the term of the debt. Perhaps just borrowing now before borrowing rates explode when the delusional Central Bank rate suppression lid blows off this 15 yr farce.