Asset markets are frothy. That shouldn’t come as a surprise to investors who spend even a few minutes a day doing some remedial analysis. It may however come as a shock to the growing crowd of investors who continue to blindly throw money at index based ETFs using the same tired return assumptions they used when valuations were much lower.
Stocks aren’t the only asset class where things look frothy though. Here the FT highlights investor exuberance in the bond market where investors recently placed almost $10 billion in orders for a $2.75 billion 100-year bond from Argentina—a serial defaulter.
How do you say “credit impulse” in Spanish? Investors might find it sensible to ask this question now. This week, Argentina startled the markets by issuing $2.75bn worth of century bonds, with an effective yield of 8 per cent. You might have thought this would be a hard thing to sell. After all, Argentina has defaulted on its debts eight times in its 200-year history, with no less than five defaults in the past century alone, most recently in 2014 amid a legal dispute with the Elliott hedge fund.
Indeed, the country is still considered such a big political and economic risk that the MSCI equity index, reviewing country rankings this week, left Argentina ranked as a “frontier” nation, rather than upgrading it (like China) to the emerging market camp.
But investors do not seem to care: there were $9.75bn of bids. And Argentina is not the only peculiar event in bond markets this month. Take a look, for example, at Ivory Coast. In recent weeks, this west African nation underwent yet another military uprising. But this month it sold 16-year bonds with a 6.25 per cent yield — and these were also heavily oversubscribed. Places such as Senegal and Egypt have also seen hot demand for their debt.
Read more here.
Jeremy Jones, CFA
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