Junk Bond Froth Seeps into Emerging Markets

High-yield debt of companies in emerging markets are at their most expensive level in seven years relative to U.S. bonds.

Junk bonds of companies in emerging markets are the most expensive in seven years relative to the U.S., underscoring concerns by policy makers from Mexico to the Philippines who say the threat of asset bubbles is increasing.

Speculative-grade securities from nations including China and Brazil returned 14.8 percent since end-June, versus 9.4 percent in the U.S., according to Bank of America Merrill Lynch indexes. Emerging-market yields fell to 7.3 percent from 9.3 percent a year ago even as net debt rose to a record 3.02 times earnings before interest, taxes, depreciation and amortization, data compiled by Bloomberg show. The median yield-to-leverage ratio of 2.4 compares with 2.1 in the U.S., the smallest premium since 2005, the year before developing-nation returns lagged behind.

Profit Pressure

Emerging market businesses have been adding debt even as profit growth slows and borrowing costs stop tumbling. Ebitda at companies in Bank of America Merrill Lynch’s high-yield index increased 9.5 percent in the past 12 months, less than half the 23 percent pace a year earlier, data compiled by Bloomberg show.

Bond Returns

U.S. Federal Reserve Governor Jeremy Stein said Feb. 7 that investors’ “fairly significant pattern of reaching-for-yield” doesn’t “bode well” for speculative-grade debt.

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