EM debt bubble

By Professor Avinash Persaud, Peterson Institute for International Economics

Debt is political. There is perhaps no better illustration of this than the observation that during the darkest hour of the budget stand-off between the US House of Representatives and the White House in January 2013, the yield on 10 Year US Government Bonds barely lifted above 2.0 per cent.

Adjusted for expected inflation and the real yield was 0 per cent, close to the implied default risk. In Washington, the US was teetering on the edge of a fiscal cliff. On Wall Street, it was boasting record low risk premia. Those in search of analysis as unfiltered from political spin as possible will welcome the new FT-IMF on-line tool that allows users to plug in various scenarios and see the likely evolution of debt levels. Naturally, some caution is required. Read more

By Jan Dehn, Ashmore Group

As the Fed prepares to hike rates in 2015, the window of opportunity presented by hyper-easy monetary policies for developed economies to undertake deeper fundamental reforms is rapidly closing.

So far, hardly any progress has been made. President Obama’s tenure has not seen the country’s economic problems solved. US trend growth has halved since the 1960s, while the debt stock has doubled to more than 350 per cent of GDP (not counting the further 300 per cent of GDP in unfunded social care liabilities). Europe and Japan recently re-engaged in QE-type stimuli to defend their fundamentally challenged economies from the effects of higher US rates in the future. Read more

With about $300bn issued last year and a similar amount expected this year, surely the market for EM corporate bonds is getting a bit frothy?

Brett Diment, head of emerging markets and sovereign bonds at Aberdeen Asset Management, says not. And although he points to some reasons for caution, he thinks this is a market that still has legs. Read more