The bonds of emerging countries, which have been following sounder policies than the US and eurozone, are attracting investors seeking to diversify risks as well as earn high returns.
Today, emerging markets represent 10 percent to 15 percent of the global debt market, up from 6 percent in 2000, and even big money managers such as PIMCO and BNY Mellon in the US, or Swiss private bank Pictet have jumped into the game.
“Since the summer when the US lost its triple-A rating from Standard & Poor’s there has been a very marked interest in this category of assets,” Pictet Paris director Herve Thiard said.
“At more than 6 percent on average, the return on emerging country debt is very attractive in [US] dollars as well as in local currencies — it is more than three times that on US Treasury bonds” which are currently yielding about 2 percent, said Brigitte Le Bris, head of fixed-income investment at Natixis Asset Management.
Currently, Brazilian bonds denominated in reals bring in returns of over 12 percent per year.
Another plus, the fundamentals of these countries are generally more solid than for the US or the eurozone, which the Organisation for Economic Co-operation and Development said is entering a slight recession.
In a major role-reversal, emerging countries have now started lecturing advanced countries about the need to balance budgets.
“The weak growth and deep deficits in developed countries drove the need for a geographical diversification in favor of countries with growth and ... sound public finances,” bond specialist Ernesto Bettoni at BNP Paribas bank said.
The IMF says that emerging countries have on average public debts equivalent to 40 percent of GDP compared to 90 percent for rich countries.
That divergence is expected to widen further through 2015, said Didier Lambert, a bond manager at JP Morgan Asset Management.
Certain countries have been able to keep their debt level very low, such as Russia at 11.2 percent of GDP, thanks to its oil windfall.
While ratings agencies have repeatedly downgraded their ratings of southern European countries and the top triple-A ratings eurozone countries are under threat, they have raised their ratings for emerging markets.
Last month, Standard & Poor’s raised Brazil’s rating one notch to “BBB,” citing in particular the ability of its economy to withstand the slowdown in the global economy.
Since last year Thailand, Malaysia, the Philippines and Indonesia have also had their ratings upgraded.
“These countries are now better armed to battle against a crisis scenario,” Le Bris said.
“Inflationary pressures have been contained in most of the countries, except in Turkey or South Africa. Since 2008 central banks have raised rates and their currencies have appreciated, currency reserves have grown, budgets are globally in balance,” she said.
“All these elements help them to better resist external shocks,” Le Bris added.
Finally, emerging country bond markets have more players, which makes trading fluid, with local investors such as pension funds, insurance companies and central banks increasingly active.
Bonds in local currencies are becoming accessible for foreign investors, such as in Mexico, Brazil and Colombia.
China has yet to open up yuan-denominated debt to foreign investors, but is slowly opening up its currency. Since last year it has allowed foreign companies to issue debt in yuan.
Well aware of heightened investor interest, G20 leaders have called on emerging markets to develop local currency bond markets.
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