Emerging market debt managers have warned about the need to be selective when picking government bonds after a glut of issuance this year.
International sovereign bond sales by emerging markets reached nearly $69.5bn (£40.9bn) in the first six months of the year – a record, according to Thomson Reuters. The figures do not include Chinese government debt.
This was largely in line with market expectations, but managers have cautioned about the quality of some of the issuance.
Some countries have been able to come back to the market, in spite of problems in the not-too-distant past.
Greece had been locked out of the bond markets since the eurozone crisis kicked off in 2010, but in April returned to the markets looking to raise up to ¤3bn (£2.4bn) on a 5-year bond issue, which was significantly oversubscribed.
Ecuador has also returned to the bond markets this year, in spite of defaulting in 2008. The most active nations in 2014 in terms of issuing debt include Slovenia, Turkey, Indonesia, Romania, Hungary and Latvia.
Appetite for lower quality emerging market debt could be a problem, however, if people who hold the debt all try to sell at the same time.
Claudia Calich, who runs M&G Investments’ £29.9m Emerging Markets Bond fund, said weaker credit would become less popular as interest rates rose.
“It depends on what the proceeds are being used for [but] if it’s for current spending then that’s a major red flag to investors,” the manager said.
“Macedonia entered the market and I bought its bond, but Serbia and Croatia have low growth and high fiscal deficits, so I wasn’t interested in their bonds,” she said.
Brett Diment, head of emerging market debt at Aberdeen Asset Management, said “the pricing of some issues has not necessarily reflected the underlying risks”.
However, he said given “ultra-low yields in the developed world”, emerging market bonds remained attractive.
