How the Emerging Market Bond Bonanza Helps Explain the Global Financialization of Assets

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IVORY COAST - MARCH 5: View of St Paul's Cathedral and the Cite' Administrative buildings, Abidjan, Ivory Coast. (Photo by DeAgostini/Getty Images)

By Tracy Alloway

  • EM debt sales highlight secular stagnation, Macquarie says
  • Ivory Coast, Senegal among countries that have sold this year

    Would you like a little Ivory Coast with your 16-year Senegalese securities? Perhaps some Ukrainian debt to go with your Iraqi five-year bonds? For something really unusual, try the Argentine 100-year bonds.

    A spate of frontier and emerging-market bond sales stretching from the grassy highlands of Mongolia to the lush tropics of Sri Lanka have underscored investor appetite for financial assets of all stripes in recent years. While many see the debt sales as evidence of another bout of “irrational exuberance” in the market, the buying makes sense when cast against permanently low interest rates, according to Macquarie Group Ltd.’s Viktor Shvets and Chetan Seth.

    “The idea behind buying emerging market bonds at such slim spreads is that the world is stuck in a secular stagnation, with permanent disinflationary pressures,” the analysts wrote. “This has been our view since at least 2010, but policy makers still strongly wish to normalize. Thus, the key risk facing investors in Ivory Coast bonds is one of policy errors.”
    A falling cost of capital in a world with little chance of raising benchmark interest rates without upsetting the apple cart of economic growth and rapidly-expanding financial markets could go some way towards explaining why investors continue to buy the paper of politically risky sovereigns, they wrote. With yields expected to continue to fall and deflation continuing apace, Ivory Coast bonds with a yield of 5 to 6 percent “might end up to be a good investment.”

    “No one could possibly expect Ivory Coast to repay bonds, but then the same applies to the rest of the world, as the ‘financial cloud’ ($400 trillion-plus) continues to grow,” the analysts said. “There is simply no alternative to financialization as neither economies can sustain higher rates nor the supply of financial instruments can be curtailed.”

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