I don’t normally take a negative position in this segment but this one has gotten so crazy I feel compelled to address it.

Companies in emerging markets are issuing debt at record levels, and the world is buying them at record levels, too. In fact, buyers are acting as crazily in this market as anything I have ever seen.

How crazy?

Telefonica Colombia hoped to raise $750 million dollars in a recent bond offering. They had $7.5 billion in offers.

[ad#Google Adsense 336×280-IA]Mexichem recently offered a new bond that had 15 times as many buyers as they had bonds to sell.

15 times!

Bond issues are up 10 times in the EM’s in just 10 years; from $20 billion in 2002 to $200 billion this year.

Fueling this frenzy is the fact that dollar denominated government issued bonds from the EM’s are hitting record low yields, so yield starved investors are pouring money into the corporates.

Robert Abad, an emerging market bond specialist from Western Asset Management said in a recent interview that lower quality companies are getting scads of cash that in a normal market wouldn’t get a penny.

Add to this bond buying craziness the fact that many of these developing countries do not have the bankruptcy protection we are accustomed to here at home, and the lack transparency, and you have all the components for a real disaster.

Never in all the years I have been in the markets have I seen any investment where people were throwing money at it, at this rate, with as many risks as these bonds carry, that wasn’t a prelude to a black swan event, or at least a major selloff.

It may take some time for it to fully develop, but this is one area where I would take profits and avoid. There are better places to be.

— Steve McDonald


Source: Investment U