An emerging threat

WHEN the returns on cash and government bonds in the developed world are zero, or even negative, it is hardly surprising that investors are casting their nets more widely. In the process the 'search for yield', as it has been called, has inevitably turned its attention to emerging markets.One or two decades ago, emerging-market sovereign debt might have been the only beneficiary of these flows. But government bonds do not offer such a juicy return these days; the yields on ten-year bonds issued by Malaysia and the Philippines, for example, are around 3.6%.As a result, investors are taking a big extra risk and piling into emerging-market corporate debt. So far this year bond funds in that sector have received inflows of $11.5 billion, according to HSBC. Their enthusiasm has been rewarded. Bloomberg's emerging-market corporate-bond index has returned 13.4% since January 1st, compared with a return of just 4.4% from American Treasury bonds (see chart). This rally has occurred despite early-year wobbles about the strength of the Chinese economy and the impact of higher American interest rates.The improved...Continue reading
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