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Latin debt is a safe haven for investors

With worries about US corporate credit scaring bond market investors far more than Argentina’s default, emerging-market issues have retained their popularity. Emerging-market debt offers low volatility, rising prices and decent volumes. Latin issuers remain in the vanguard. The only problem is that their bonds are beginning to look expensive.

Emerging sovereign debt markets in general, and Latin American sovereign bonds in particular, had a surprisingly good year in 2001, considering that the largest sovereign bond issuer of all time defaulted on some $100 billion of global bonds. The Argentine default was very clearly flagged, allowing virtually all professional bond investors to exit the country in good time. At the same time, investors in US corporate debt, from Enron to WorldCom, were starting to get jittery about their own market. The parallel waves of selling - in Argentina and in US corporate debt - left bond investors sitting on far more cash than they would normally be comfortable with.

Meanwhile, emerging-market debt markets were looking healthy. Pick any bond-issuing country in the world: chances are, if it isn't Argentina, it returned more than 10% in 2001. And the returns weren't at the expense of market risk, either: volatility in JPMorgan's EMBI+ emerging-market bond index has now declined to just 3.6%, its lowest level since 1995. That's below the normal level of 10-year US treasuries, and compares with treasury volatility levels closer to 10% at the moment.

Low volatility, however, does not mean low volumes - quite the opposite. Even with the slump in Argentine debt trading, total volume in emerging-market debt rose 22% in 2001, to a total of $3.5 trillion. It's now at its highest level since the Russia crisis of 1998, and the 2001 figure marks a 59% jump from the $2.2 trillion that was traded in 1999.

Part of the reason is that investing in emerging-market debt is much more difficult now than it used to be in the days when you just bought new issues from the big three - Argentina, Brazil and Mexico - and banked the coupons.

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