Anybody wondering where all the money is going should look south. Mexico and Peru are safer than Portugal or Ireland, judging by 10-year bond yields, and Brazil is more favoured than Spain. With Europe’s creditworthiness sliding and the US economy drifting, emerging market economies look particularly inviting. The sentiment is not confined to sovereigns. Foreign currency-denominated emerging market corporate bond issuance is on target this year to outpace the record $153bn issued in 2007, according to JPMorgan.
A rising tide of creditworthiness among emerging market sovereigns is lifting corporate boats. Standard & Poor’s says the proportion of speculative-grade issuers has fallen from 66 per cent a decade ago to 54 per cent. Corporate issuance by emerging market borrowers is now running at at least twice the pace of sovereign borrowing.
For foreign investors, these bonds are an appealing way to play the carry trade. For issuers, the cost is a lure, although not necessarily cheaper than bank funding. The real attraction is longer maturities – seven years and beyond. As the pace of issuance grows, the market gets larger and more liquid, and is no longer off-benchmark. JPMorgan reckons all corporate outstandings (including investment-grade and high yield) will reach $680bn by year-end and could top $1,000bn by 2014 – about the size of the US corporate high-yield market.