Global Bond Frenzy Raises Concerns

Feb 19, 2014. Landon Thomas. New York Times

Global bond investors have financed some of the most enormous projects ever taken on by emerging economies the past few years.

Now growth is faltering in many developing nations,  so economists and regulators are increasingly worried about the consequences of this borrowing frenzy and the risk that the mutual funds and hedge funds that have largely replaced more stable commercial banks as global financiers might all decide to rush for exits at the same time.

Fears remain that any panicky selling of Chinese, Russian or Brazilian bonds could turn into a financial rout.

Scott A. Mather, the head of global portfolio management at the mutual fund giant Pimco: “Many years of private sector credit growth have created serious vulnerabilities.”

Analysts point out unlike the Asian financial crisis in 1997 caused by government borrowing, this debt binge was funded largely by global bond investors and companies outside Asia.

The underlying problem, Mr. Mather said, is that bond investors with little or no experience in emerging markets piled in to pursue higher yields than they could get from safer government securities in the United States and elsewhere, snapping up the bond issues of companies with even riskier credit profiles.

The stampede has led to a so-called mirage of liquidity in which many investors may have been misled into thinking that selling the securities will be as easy as buying them was.

“The liquidity is much worse now than before the crisis,” Mr. Mather said.