Salient to Investors:
Junk bonds of companies in emerging markets are the most expensive in 7 years relative to the US, raising concerns the threat of asset bubbles is increasing. Emerging market businesses have been adding debt even as profit growth slows and borrowing costs stop tumbling. JPMorgan said funds investing in developing-nation bonds attracted $13.5 billion in 2013, versus a record $97 billion in 2012.
Brigitte Posch at Pimco said that if global economic conditions remain sluggish, high-yield companies will be at risk given their high leverage, and has reduced holdings of emerging-market corporate debt while looking to add good credits.
Bank of America Merrill Lynch indexes show that when the yield-to-leverage ratio for junk borrowers in emerging markets fell this low versus American peers in 2005, the developing-nation index returned 9.3 percent the following year, trailing the 11.8 percent gain in the U.S.
US Federal Reserve Governor Jeremy Stein said investors’ significant pattern of reaching-for-yield bodes ill for speculative-grade debt.
Chris Hays and Oleg Melentyev at Bank of America said investors have begun to care less about whether or not a bond compensates them appropriately and more about whether the bond compensates them at all.
IMF predicts 2013 growth for developing nations at 5.5 percent versus 1.4 percent for advanced nations.
Philip Meier at DWS Investments said emerging market bond yields are high enough to compensate investors for the risk of a selloff in global debt markets, and investors are still keen on adding emerging markets corporates exposure. Meier expects the emerging markets discount to narrow further in a positive market environment in 2013.
Guillermo Osses at HSBC Asset Mgmt said the quality of bonds issued now is lower than it was 6 months ago and has reduced holdings of high-yield corporate bonds. Michael Shaoul at Marketfield Asset Mgmt said massive credit issuance comes hand in hand with slippage of underwriting standards, and the class of 2013, 2012, 2011 will have much worse credit conditions than we are used to.
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