Emerging market ETFs: solving the liquidity problem or storing it up? - FT.com

Emerging market ETFs: solving the liquidity problem or storing it up? - FT.com:



"Anyone looking for financial bubbles at risk of bursting will be watching the rise of hard currency emerging market corporate bonds. Ten years ago, the asset class hardly existed. Today, at an estimated $2tn, it is bigger than the $1.6tn market in US high yield corporate bonds, familiar to investors for decades.



Investors have been drawn by high yields, offered even by investment-grade EM corporate issuers. But with high returns come high risks, and not only those related to repayment. EM corporate bonds are often dangerously illiquid, making them hard to get rid of in a crisis and meaning their prices can change rapidly when the mood of the market turns.



Last week, Robert Grossman and colleagues at Fitch Ratings published a report comparing 100 of the largest US high yielding corporate bonds with 100 of the largest non-investment grade EM hard currency corporate bonds. They found that, between June 30, 2014 and March 31 this year, 55 per cent of the US HY bonds traded on more than 95 per cent of trading days, while this was true of just 18 per cent of the EM bonds. Conversely, while 41 per cent of the EM bonds traded on less than half the trading days, this was true of just 1 per cent of the US HY bonds."



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