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The Next Subprime Bubble
By admin July 22, 2014

The Financial Times reported over the weekend “debt market euphoria could be storing up trouble for the future”. This concern was caused by the recent measure of international sovereign bond sales by emerging markets, which reached $69.47 billion in the first six months of this year. This represents a 54% increase from the same time last year.

With quantitative easing coming to an end and with interest rates forecasted to rise by the middle of next year, some are questioning whether investor’s search for yield have pushed them into dangerous markets. Last year, the “taper tantrum,” the markets reaction to Ben Bernanke’s initial comments on tapering, caused billions of dollars worth of outflows from fixed income funds and emerging economies alike. The likelihood of such a reversal happening again is high especially when considering the fragile state of many emerging market economies.

Greece, Ivory Coast, and Ecuador all have had successful bond issuances within the past few months raising 20 billion euro, $750 million USD, and $2 billion USD respectively. Each country has had its share of issues but none more than the Ivory Coast who just defaulted in 2011. Surprisingly, a 3-year gap with little economic reform not only attracts investors but will allow you to borrow at a lower rate than Kenya (Ivory Coast’s 10-year bonds were priced to yield 5.625 where as Kenya’s recent auction had their bonds priced at 6.875). This type of odd pricing is not unique to Africa. At the beginning of June, Spain’s 10-year bonds fell below that of US 10-year Treasuries.

With the Fed’s balance sheet at historic levels the amount of money moving around the global market place is substantial.   The search for yield has caused many investors to ignore typical warning signs like current account deficits, significant levels of government debt, prior defaults, etc. When interest rates rise again countries will be faced with significant outflows and higher costs of debt. It’s a safe bet that when this occurs the full risk of these investments will be realized.

For more information:

  • “Investors hope for normalisation after taper tantrum | GlobalCapital.” Investors hope for normalisation after taper tantrum | GlobalCapital. N.p., 31 Mar. 2014. Web. 21 July 2014. <http://www.globalcapital.com/article/kqs88gmwczdq/investors-hope-for-normalisation-after-taper-tantrum>.
  • Benjamin, Hannah. “Ivory Coast Sells Post-Default Eurobond for Less Than Kenya.” Bloomberg.com. Bloomberg, 16 July 2014. Web. 21 July 2014. <http://www.bloomberg.com/news/2014-07-16/ivory-coast-plans-to-sell-post-default-eurobonds-below-kenya.html>.
  • Kotze, Francois. “The taper tantrum – emerging market sell-off edition.” The taper tantrum – emerging market sell-off edition. N.p., n.d. Web. 21 July 2014. <http://www.spi.sanlam.co.uk/investment-thinking/investment-blog/taper-tantrum-emerging-market-sell-edition/>.
  • Lamb, Katrina. “Investing In Emerging Market Debt.” Investopedia. N.p., n.d. Web. 21 July 2014. <http://www.investopedia.com/articles/bonds/07/emerging-market-debt.asp>.
  • Moore, Elaine . “Emerging market debt issuance hits record high – FT.com.” Financial Times. N.p., 20 July 2014. Web. 21 July 2014. <http://www.ft.com/intl/cms/s/0/7e87f0d0-0c2d-11e4-9080-00144feabdc0.html?siteedition=intl#axzz386uDEfOd>.
  • Rapoza, Kenneth. “Happy Anniversary To Market’s Taper Tantrum.” Forbes. Forbes Magazine, 23 May 2014. Web. 21 July 2014. <http://www.forbes.com/sites/kenrapoza/2014/05/23/happy-anniversary-to-markets-taper-tantrum/>.
  • “Soveriegn debt default is not new. Here is a list most recent 77 countries who have defaulted.” Soveriegn Debt Default. N.p., 18 June 2014. Web. 21 July 2014. <http://www.gatewaytosouthamerica-newsblog.com/gtsa-general/argentina-general-en/argentina-lifestyle/soveriegn-debt-default-is-not-new-here-is-a-list-most-recent-77-countries-who-have-defaulted/#.U80bX6hNZKk>.
  • Zeng, Min . “Soveriegn debt default is not new. Here is a list most recent 77 countries who have defaulted.” Soveriegn Debt Default. Dow Jones & Company, 18 June 2014. Web. 21 July 2014. <http://www.gatewaytosouthamerica-newsblog.com/gtsa-general/argentina-general-en/argentina-lifestyle/soveriegn-debt-default-is-not-new-here-is-a-list-most-recent-77-countries-who-have-defaulted/#.U80bX6hNZKk>.

 


Thanks for sharing !


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