Tags: Emerging | bond | markets | crisis

NYT: Explosive Growth in Emerging Market Bonds May End in Crisis

Friday, 21 Feb 2014 08:31 AM

By Dan Weil

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Emerging market bonds have mushroomed in size over the past few years, as bonds have been used to finance the fledgling economies' heady growth.

But the expansion of these markets creates the risk of a blowout should investors move to sell en masse at the same time, The New York Times reports. Financial markets in emerging economies have tumbled this year amid economic, financial and political concerns about these countries.

As for bonds, "it's fair to say that the market got a little over-exuberant," Scott Mather, head of global portfolio management at Pimco, tells The Times. "Many years of private sector credit growth have created serious vulnerabilities."

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In the five years through Sept. 30, emerging markets issued $1 trillion of external bonds, according to Bank of America Merrill Lynch.

Many of the bondholders could turn out to be very fickle. Some are inexperienced investors who sucked up emerging market bonds for the higher yields they provide compared with safer debt in the United States and elsewhere, Mather explains.

But the liquidity these investors enjoyed on the way in to the market may not be available on the way out, he adds.

Investors already are dumping their emerging market holdings.

Emerging market bond funds saw an outflow of $1.4 billion in the week ended Feb. 12 and $8 billion for the year-to-date through that week, according to EPFR Global, Bloomberg reports.

Investors also took $3.1 billion out of emerging market stock funds for that week and $21.7 billion year-to-date.

The combined year-to-date total for stock and bond funds — $29.7 billion — already surpasses the entire 2013 total of $29.2 billion.

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