For months, some experts have warned that junk bonds and emerging market bonds are overpriced. But that hasn’t stopped investors from continuing to jump in.
During the week ended March 10, they put a record $1.2 billion into junk bond funds and a record $1.1 billion into emerging market bond funds, according to EPFR Global.
And EPFR managing director Brad Durham told the Financial Times that the trend is continuing.
Investors had shied away from those markets recently amid concern about contagion spreading from Greece’s financial woes.
But a successful Greek bond issue and belief that the country will be bailed out by the European Union or the International Monetary Fund have buoyed investor sentiment.
And, of course, the record low interest rates created by central banks around the globe have investors searching for yield wherever they can find it.
Emerging market bonds have produced returns of 30 percent over the last year, while junk bonds have soared more than 60 percent in the United States and 80 percent in Europe, according to Bank of America Merrill Lynch.
But Durham urges caution.
“There are a lot of fundamental reasons why you wouldn’t want to increase your allocation now. Global central banks will be increasing rates eventually.”
Still, some remain enthusiastic.
“The perception that emerging markets have got better prospects over developed markets seems to be an ongoing theme,” Masahide Hoshi, a director at Phalanx Capital Management, told Bloomberg.
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