The Problem With Emerging Bond Funds

Buyside In The Crosshairs

With banks on the back foot, asset managers have become the main bond market players, prompting watchdogs such as the BIS to warn they could suffer most from any future debt blowout.

Waves of central bank money printing -- with the euro zone kicking off full-fledged bond-buying next month -- have sent hordes of new, cash-flush fund managers to emerging markets.

But this has manifested itself largely in primary markets where new bonds, even from weak names with little or no borrowing track record, have been enthusiastically received.

So enormous is this tidal wave, that of the $750 billion in emerging corporate debt listed on the CEMBI index, only a tenth is now held by dedicated EM funds, the EMTA conference heard.

Electronic trading could be one solution, at least for smaller deals -- e-trading platform MarketAxess says secondary EM debt volumes rose 18 percent between 2013-2014.

Emerging market banks too may step up as alternative market makers, said the BIS study which found inventories growing at Asian and Latin American banks.

But Allianz's Saichin says that for now there is only one realistic strategy to counter risks of a market seizure.

"What to do with good entities you took on when liquidity was plenty and... all of a sudden the market doesn't allow you to move them around?" he said. "The answer is: if you want to invest, buy something you will want to hold for a long time."