Is There an Emerging Market Bond Bubble?

Includes: EEM, PCY
by: Kurt Brouwer

Lots of cash is flowing into bonds issued by Brazil, Thailand, China, India and the other countries we call emerging markets. Historically, emerging market bonds have been a pretty modest part of the world’s financial markets. They still are pretty small potatoes now compared to bonds issued by the U.S. Treasury and other countries such as Japan, but the amount of cash flowing into emerging market bond funds has been staggering as this chart (click to enlarge) demonstrates:

Source: Clusterstock

As you can see, there have been previous upsurges in cash flowing into emerging markets bonds, but this one dwarfs all previous ones. The argument for investing in emerging economies is a good one, but this information suggests that a bubble may be forming. As we have seen in other markets, fundamentals can be good, but if price gets too far ahead of fundamentals, trouble ensues.