PineBridge: Downgrades of Emerging Market Bonds Are Rarely Contagious

The distressed bond markets in Russia and China’s property sector don’t imply a dark future for emerging market debt as a whole.

Qilai Shen/Bloomberg

Qilai Shen/Bloomberg

Emerging market countries diverge sharply when it comes to economic growth and credit risks. For bond investors, that could be a good thing.

That’s because there’s little risk that a bond default in one region would be passed on to another. According to Jonathan Davis, senior v.p. and fixed-income client portfolio manager at PineBridge Investments, emerging market bonds provide good diversification benefits, since the downgrade of a bond is rarely contagious.

Take Russia and China, for example. The default rate for high-yield corporate bonds in emerging markets as a whole is 4.5 percent year-to-date, according to Davis. But if Russia and China’s property sector are excluded, the default rate is around 50 basis points, with expectations that it will increase to 1 percent in the near term.

Russia’s aggression in Ukraine and China’s highly leveraged property developers have created the worst wave of emerging market bond defaults since the Global Financial Crisis. The severe sanctions on Russia imposed by the West have led it to pay back some of its dollar-denominated debt in rubles. In April, S&P Global rated Russia’s government bonds as a “selective default” after the country failed to repay $650 million in debt denominated in U.S. dollars. In 2021, China’s real estate players were besieged by declining home prices, bond defaults, and dropping consumer confidence. The largest Chinese real estate borrower, Evergrande, defaulted on $20 billion of its $300 billion in total debt and triggered a series of downgrades of China’s property bonds.

Still, according to Davis, the distressed bond markets in Russia and China’s property sector don’t imply a dark future for emerging market debt as a whole. “The reason I bring up [the numbers] is not to say that those defaults don’t matter. They certainly do,” Davis said at a roundtable on Tuesday. “But what it’s telling us is that we don’t see much contagion in market pricing, and we don’t see much contagion in the ability of those other high-yield issuers to continue servicing their debts.”

Davis added that unlike the developed markets, these regions generally have very different economic conditions, which is ideal for investors seeking to diversify their risk exposure. “What we always long for as credit investors is a market where [we] can have more localized, idiosyncratic events that do not impact other components of [our] portfolio,” he said.


In addition, some emerging market economies like Brazil, Mexico, and Chile have reacted more proactively to inflation pressure, which makes them more prepared than developed countries for macroeconomic shocks. “From the domestic economy standpoint, we are less concerned [about] the impact [that] high rates and inflation can have on consumers [in emerging markets],” Davis said. “But it certainly varies country-to-country.”