Why Are Investors Continuing to Pile Into Emerging Market Debt? 2

Investors have been piling into emerging market debt

Emerging market debt (EMB) volume has been rising at a solid pace. Much of the credit is attributable to the rising issuance and attractiveness of local-currency debt (LEMB) (EMLC) being issued by emerging markets. 2016 saw a record $506 billion of local-currency emerging market bond issuances, up 32.5% from 2015, according to Bloomberg data. Also backing the above trend is the emerging market debt-to-GDP ratio, which stood at 42.7 at the turn of 2017. It was below 40 back in 2012. IMF expects the rise to expedite from here, and the ratio to cross 43.5 over the next two years.

2017 EM debt issuances expected to exceed 2016

Recovering commodity prices and refinancing requirements should buoy emerging market debt issuances in 2017, which are expected to outpace 2016. Sovereign issuances (PCY) (VWOB) form a major chunk of aggregate emerging market issuances. In 2017, Indonesia (EIDO) and Kuwait are expected to top the list of emerging market sovereign debt issuers.

Reduced risk

Sovereign CDS (credit default swap) rates are at levels last seen in 2012 (see chart above). In its simplest form, a CDS is a form of insurance against default by the issuer. So, higher the probability of default, greater the CDS spread. The cost of the CDS can be seen as the premium one pays to buy insurance. Now, CDS rates for emerging market sovereign debt have been declining through 2016. This is a good sign for emerging market countries as the perceived riskiness associated with their sovereign issues has been declining.

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Within emerging market debt, local currency debt is gaining prominence as discussed in the next part of this series.

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