Emerging market bonds have had their best start to the year on record as new issuance has surged and interest rate premiums over US Treasurys have narrowed to their lowest since 2008.
Sovereign bond markets in developing countries have seen a record $129 billion in new deals so far this year, a 42 percent increase over the same period last year, the previous record for issuance, according to Dealogic.
Bond yields, which have been tightening since March last year, have narrowed further in the past two weeks as the success of Greece’s new debt offering at the start of the month stabilised markets.
Emerging market yields narrowed to 2.57 percentage points over US Treasurys on Monday compared with 3.5 percentage points a month ago, according to JPMorgan’s Embi+ index.
That is a sharp fall from the recent cyclical peak of 6.84 percentage points in March last year and just a fraction of the all-time peak of 16.64 percentage points over US Treasurys in September 1998.
The index, which tracks the 16 biggest emerging bond markets, was launched at the end of 1997 after the Asian financial crisis.
Bryan Pascoe, global head of debt syndication at HSBC, said that optimism surrounding Greece had boosted emerging market bonds, allowing governments to lock in low borrowing rates.
However, other bankers warn that a sell-off may be imminent as interest rate spreads over benchmark bonds have tightened too far, particularly in markets such as Indonesia and Brazil, which have been among the best performers.
Nigel Rendell, senior emerging markets strategist at RBC Capital Markets, said: “It is a good time for investors to take some profits and wait for a better time to buy as the market is almost certain to fall in the next few months.”
Brett Diment, head of emerging market debt at Aberdeen Asset Managers, added: “There is very low default risk among the emerging markets and that is why yields have fallen so low, but some markets do look very expensive.”
Indonesian five-year bond yields, for instance, have fallen to 3.77 percent, down from 9.49 percent when the debt was issued in February last year. That means the country is paying 1.38 percentage points over US Treasurys versus 7.58 percentage points in February 2009.
Other strong performing government bond markets have included Brazil, Poland, Hungary and South Korea, which have all seen a sharp narrowing in their yields over Treasurys.