A serial deadbeat (Argentina) got investors to buy 100-year bonds, Sri Lanka’s latest debt sale was oversubscribed by 10 times, tiny Belarus is poised to issue eurobonds, and even Papua New Guinea, the impoverished Pacific Island nation, is planning its overseas debut in the second half of the year.
But, as Bloomberg reports, that's just a small sampling of the risks emerging-market investors have started taking, even as yields remain relatively thin.
But there's more: defaulted notes from Mozambique are among the best performers in 2017. The Maldives, a tiny nation in the Indian Ocean, sold its first international bond earlier this month. And Ecuador, where the former president disparaged bondholders as “true monsters” when he defaulted in 2008, had no trouble raising $3 billion.
Century bonds in EM are still rare, but have become more popular as global yields have collapsed...
What’s even more stunning than investors' tolerance for these risky issuers is how little compensation they’re demanding in return. Emerging Market bonds are pricing in the least 'risk' since Dec 2007...
The disconnect is a result of historically low interest rates worldwide -- notes in Japan, Germany and France have negative yields -- as well as what skeptics see as investors’ complacency as they pour into index-based funds without scrutinizing their holdings.
“I’m guessing the alarm bells are ringing, and in many ways it feels like 2007,” said Anders Faergemann, a senior fund manager in London at PineBridge Investments, which oversees about $80 billion globally.
“Dedicated EM investors are dancing ever closer to the exit door, but for those of us who were around in 2007 there was a long period in which EM continued to rally even though valuations were stretched.”
And he may well be right as the lagged effect of China's Credit Impulse appears to be about to crush all those greater fools flooding into EM debt at historically record low risk premia...
As Bloomberg concludes, low market volatility has spurred a “torrent” of capital flows into emerging-market debt, reflecting investor complacency and “excessive risk taking,” Bank of America Merrill Lynch strategists led by David Hauner in London wrote in a report last week.
He warned that the second half of the year should bring challenges for lower-rated issuers as higher interest rates in the U.S. reduce some of the appeal of junk credits with relatively steep interest rates.
“The market is at a point where we haven’t hit a real bump in the road to wake everyone up.”