Despite rising risks of defaults among emerging nations, 14 developing economies have sold $41 billion worth of bonds in the first 12 days of this year on signs that inflation is easing and hopes that China’s economy will rebound, which would raise demand for raw materials, the Financial Times reported.

The pace of bond sales has set a January record, according to Bank of America.

Hungary, Mexico, and Turkey are among the countries making sizable bond offerings.

Also, investors are assuming central banks will ease their pace and size of rate increases, which would make it easier for emerging economies to meet their bond payments, the FT said.

Emerging markets lived through a brutal year in 2022, with rising interest rates closing down lending venues and raising their debt service payments. 

Sri Lanka and Zambia were among nations that defaulted on their loans, while Egypt and others tried to wangle bailouts from the International Monetary Fund.

“Last year, the [lending] market continued to get worse as it went on,” Stefan Weiler, chief of emerging market debt at JPMorgan, said to the FT. “This year, many sovereign borrowers have jumped through this window of opportunity as quickly as they could.”

Investors were ready to meet them: many now seek to expand their fixed-income portfolios after taking a beating in last year’s stock markets, the FT noted.

Debt in foreign currencies has increased 1.7 percent so far this year after decreasing 17.8 percent last year, data from JPMorgan shows.

While many Western economies are predicted to see recessions this year, the only emerging economy slated for a recession is Russia’s, Uday Patnaik, chief of emerging market debt at Legal & General Investment Management, told the FT.

His company has just bought bonds from Israel, Mexico, and Turkey.

TRENDPOST: Investors buying emerging markets’ bonds now are betting that everything will come together Goldilocks-fashion: inflation will keep falling, central banks will pause or reverse their rate hikes, China will burst back into production and spike demand for raw materials, and a global recession will be slight if it happens at all.

If any one of these factors fails to materialize, the benefits of the rest would be reduced and so would the safety of these bond investments.

Also, dozens of emerging nations are still struggling under hefty debt burdens that we detailed in “Strong Dollar Means Weakness in Emerging Nations” (12 Oct 2022) and Tick Tick Tick: The Debt Bomb’s Timer is Counting Down,” among other articles.

Shoveling more debt onto an already wobbly sector of the global economy is not a formula for success.

TREND FORECAST: Especially in an environment of high and rising interest rates, many of these new bond issues will not perform well; some countries will default.

Even though bond buyers may have been careful in the choice of countries they back, weakness among the least stable nations will splash onto the rest and ding the value of emerging markets’ bonds as a class.

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