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A milestone was reached last month in the world of emerging market corporate bonds: Brazilian state-run oil company Petróleo Brasileiro (Petrobras) sold a US$7 billion bond offering, the biggest ever U.S. dollar-denominated bond issue by an emerging market (EM) corporation, reported the Wall Street Journal. That record deal highlights the growing prominence of corporate bonds within the EM asset class and kicks off a potentially important year in their evolution.
Yet, EM corporate bonds (EMCBs) are generally not nearly as well-known as their EM sovereign counterpart, despite a long history of issuance by EM corporations. It may come as a surprise that issuance of U.S. dollar-denominated EMCBs exceeded US$200 billion in 2011 – considerably more than EM sovereign bond issuance – or that many EM corporations have been issuing bonds in the international markets since the early 1990s, according to PIMCO research. Moreover, the size of the tradable market for EMCBs totaled about US$1 trillion in 2010, which was significantly larger than the US$614 billion EM sovereign debt market, reported Bank of America Merrill Lynch in June 2011.
We believe that EM corporate bonds are an increasingly attractive asset class, and that the market for these bonds is evolving in ways that should be noted when constructing global portfolios. As the Petrobras bond sale suggests, we see demand growing for this asset class, and we expect to see more assets managed against an EM corporate bond index this year, potentially improving liquidity in the sector. Historically, EM bond investing has come with certain risks, including credit, political and legal risks and market volatility. But PIMCO sees improvement in these areas. As more investors benchmark their EM corporate bonds to an index, as we believe they will, we expect to see a decrease in the magnitude of sell offs in times of stress – in other words, we see EM corporate bonds becoming more integral to asset allocation and more long-term holds. Also, PIMCO sees emerging markets as centers of economic dynamism with favorable circumstances for corporations vs. the developed world.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Pacific Investment Management Company LLC, 840 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626. ©2014, PIMCO.
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