EM local currency debt – what goes in can also come out (but not very easily)

October 2011_issue_06

This chart came to portfolio institutional via the bondvigilantes.com website, which in turn sourced it from UBS. The website is authored by the M&G retail fixed income team. Here Michael Riddell argues that while it has become fashionable to point to EM debt as safer than develop world debt, this situation could unravel very quickly, leading to a dramatic loss of liquidity. He points to the fact that the foreign share of local government EM debt has increased dramatically over the last few years, and is now concentrated among a handful of large investors.