Emerging market debt woes may be easing as bond market rally drives frenzy of investor demand

• A rally in the global bond market has prompted investors to look closer at emerging markets bonds.
• Many countries have borrowing costs fall, easing debt crises and making funding more available.

Countries once shunned by international bond investors are seeing a newfound rush into their debt markets.

A report in The Financial Times this week notes that recent bullishness in the bond markets over the past few months, combined with the potential for rate cuts from the US central bank, has driven a risk-on shift to emerging markets debt.

Borrowing costs for countries including Angola, Egypt, El Salvador, and Iraq, among others, have fallen in recent years, paring back concerns of a debt crisis in some countries as funding becomes more available.

Heading into 2024, accommodative monetary policy, declining inflation, and a weaker US dollar hinted at a stronger year for emerging markets, AllianceBernstein wrote in a note this month. The firm predicted more than 70% of emerging markets countries will achieve fiscal stability or see an improvement in 2024 by balancing fiscal and monetary policies.

China wields significant influence over emerging markets, and concerns have been raised about its economic slowdown acting as a headwind for EM debt, the note stated.

The world's second-largest economy has been ailing, and this week officials rolled out the largest "economic first aid package" in two years, including a $140 billion liquidity injection into its banking system via a reduction in reserve requirement. It's also weighing a $278 billion rescue package to stabilize its stock market and restore investor confidence.

The AllianceBernstein note points out a silver lining to China's troubles, which is that moderating growth in China provides opportunities for other large emerging market countries, such as India, to meet investor demand.

Yet concerns still linger about the potential for emerging market debt defaults. Experts say that lower borrowing costs don't guarantee these countries won't default.