“The demand is partly driven by genuine and significant improvements in the fundamentals in the developing world. Many countries are now investment grade, and enjoy state finances and economies stronger than many rich countries,” the FT reported.
“But aggressive monetary easing by western central banks has given this rally steroids through programs that both fill the coffers of investors and beat down yields in traditional markets,” the newspaper added. “That has spurred investors to scour the world for higher returns.”
However, emerging market bond ETFs have taken a hit recently as Treasury yields rise and investors speculate the Fed may throttle back on quantitative easing.
After the “emerging market debt bonanza” there are fears investors are set up for a fall, according to a separate FT report on Monday.
“The first is the worry that when central bank intervention eases, there could be a sharp correction,” it said.
“All credit investors are worried about losses when rates start to rise, and bond prices to fall, but this question is particularly pertinent in emerging markets where liquidity is still low in many areas and price swings can be difficult to predict,” the FT noted. “Compounding this is the fact that many of the investors piling into the market are so-called crossover investors, meaning they are not full-time emerging market fund managers but in the market briefly looking for extra yield.”
WisdomTree Emerging Markets Local Debt
Full disclosure: Tom Lydon’s clients own EMB.