EM liquidity: correlations breakdown – beyondbrics - Blogs - FT.com:
"We’ve written recently about the scarcity of liquidity on EM secondary markets caused by regulatory changes and loose monetary policies in developed economies since the crisis of 2008-09. We’ve noted that those developments have also delivered abundant liquidity on primary markets, where bonds and equities are first issued (unlike secondary markets, where they are subsequently traded).
Flush with cash and hungry for yield, many investors have snapped up emerging market bonds and other assets they might well have sniffed at in more ‘normal’ times. Some analysts worry that this is driving a bubble. It may also be causing a related phenomenon: a breakdown in the correlation between risk and reward. If that is confirmed, a lot of EM investors face a nasty surprise.
The issue shows up in the relationship between economic growth and bond yields. In ‘normal’ times, bond yields – an indication of the risk of default – tend to rise as the rate of GDP growth declines, because in an environment of slower growth, issuers are seen as more likely to default."
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