Emerging market debt and bond-related exchange traded funds offer relatively attractive yields, but investors could see higher credit risk in so-called trouble spots as growth slows and rates rise.
According to the International Monetary Fund, as much as $750 billion emerging market corporate loans could be in trouble, and investors could see more defaults down the line.
“The share of corporate debt held by weak firms is even higher now than in the period following the September 2008 collapse of Lehman Brothers,” Moody’s said.
If growth continues to slow and interest rates rise in the emerging markets, the cost of servicing the debt will increase.
“This problem goes beyond corporate bonds and includes the broader increase of credit relative to G.D.P. in many emerging markets,” Hung Q. Tran, a top executive at the Institute of International Finance, said in a New York Times article. “Countries have to put in place policies to address this if they want to avoid a bursting of the bubble.”
As the emerging markets rebounded off the financial crisis, more smaller and more financially unstable companies have issued debt. For example, Brazilian issuers have received mixed views. [A Mixed Case for Some EM Bond ETFs]