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LONDON: Emerging market bond prices have, of late, hit a record high in comparison with US government debt as investors, struggling with low interest rates, continue to diversify into higher-yielding securities.
Yield spreads on emerging market government bonds fell to just 3.45 percentage points last week over US Treasuries. This represents a fall of 13.5 percentage points on JPMorgan's EMBI+ index from their record level after Russia's 1998 financial crisis.
Jerome Booth, head of research at Ashmore Investment Management, said: "There is a huge amount of money going into the asset class."
The gains came days before Argentina's $10 billion (£53 billion) debt restructuring, which is expected to culminate in an exchange that will leave bondholders, including hundreds of thousands of retail investors, with just 34 per cent of their initial investments.
More institutional investors have begun to buy emerging market debt, encouraged by improvements in the creditworthiness of issuing governments such as Russia, which last month received an investment grade rating from Standard & Poor's.
Many funds, which only investment grade credits, have widened their exposure to emerging market debt as more developing countries have been lifted from "junk" category. As much as 41 per cent of the EMBI+ index now consists of investment grade bonds, or bonds carrying a relatively low risk of default.
In 1998, when emerging market debt prices hit bottom, the proportion was just 4.0 per cent.
Mark Mobius, head of emerging markets at Franklin Templeton, said he expected to see further gains for emerging market debt, adding that prices might yet trade at a premium to US government bonds, leaving their yields below Treasuries. "Historically, emerging markets are not so secure therefore the risk should be more than in the US. But that's the conventional thinking and it may change," he said.
Booth said investors would continue to require a yield premium for holding emerging market debt but said returns on investment could nevertheless remain strong. In the past five years, the EMBI+ index has gained 86.5 per cent, compared with losses of 6.6 per cent for the S&P 500 US equity index.
He said financial scandals at companies such as Enron and Parmalat, which left investors out of pocket, had increased interest in emerging market debt.
"After recent corporate scandals in the US and Europe, people began to realise that investing in their home markets is not the same as having no risk," Booth said. "This has fuelled a move to diversify risk," he added.
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