Emerging markets have seen renewed interest from investors of late. As a result, the JP Morgan Emerging Market Bond Plus index’s yield recently dropped to a record low of 4.5 per cent while the annual average return of the MSCI Emerging Market equity index has been 20 per cent, in dollar terms, for the past four years.
Still, according to the macroeconomic forecasting consultancy Capital Economics, a number of factors suggest that emerging markets bonds have not yet entered into bubble territory: “Although these developments have prompted claims that a bubble is forming in financial markets in the emerging world, we are unconvinced. Looking ahead, though, a bubble could form in the next two years particularly in dollar-denominated emerging market bonds, primarily as a result of monetary stimulus in advanced economies.”
Recently, Brazilian holding company J&F (which controls giant beef processor JBS), was reported to having difficulty issuing bonds in foreign markets. Rumors of 9.75% yield were being heard last week on J&F’s seven-year bond, though the company postponed the issue “due to adverse market conditions.”
GOL is another Brazilian company that had issued bonds recently. The airline was expecting to issue US$300 million in 10-year bonds at less than 10% yield though market conditions obliged the company to be content with US$200 million at an interest rate of 10.75%.