The developing world’s rapidly swelling corporate debt market is an accident waiting to happen, according to a prominent emerging-markets hedge fund that says a lack of liquidity could lead to violent price declines in a crisis.
In a letter to investors seen by the Financial Times, Gramercy Funds Management wrote that the risk of sudden dislocations has been increased by a wave of bond buying by mutual funds and exchange traded funds that allow investors to pull out money quickly.
“We are convinced that ‘liquid markets’ are not necessarily liquid,” Robert Koenigsberger, chief investment officer, wrote in a letter with senior adviser Mohamed El-Erian and two other associates of the Connecticut-based group. “The ‘perfect dislocation storm’ [is] waiting to happen.”
The emerging market corporate bond market has expanded nearly fourfold to $2.3tn over the past decade — with the high-yield sector expanding almost fivefold — as investors around the world have desperately sought higher-yielding debt.