Bond yields in developing countries including Brazil, Turkey and Indonesia are poised to increase as “rapid” credit growth raises consumer default risk, according to General Re-New England Asset Management Inc.
“Booms always appear sustainable at the time, but certain emerging countries show recognizable signs of unsustainability,” GR-NEAM Chief Investment Officer John Gilbert wrote in a newsletter published on the website of the unit of Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) “The credit growth is merely a doubling up on an unsustainable burst of demand, and must in time meet expectations of repayment.”
The average yields on emerging-market dollar-denominated bonds tracked by JPMorgan Chase & Co. fell to a record low 4.83 percent last month as falling U.S. Treasury yields prompted investors to seek alternatives for higher returns. Brazilian dollar-denominated bonds yielded 3.66 percent, or 1.79 percentage points over Treasuries, JPMorgan data show.
Brazil’s total bank lending has almost tripled to 2.2 trillion reais ($1.1 trillion) in July since the end of 2006, with the consumer default rate rising to 7.9 percent, the highest in almost three years, according to the central bank. In Turkey, the current account deficit reached a record 10 percent of its gross domestic product last year as cheap credit encouraged consumers to buy more than they produced. Indonesia’s current account surplus has turned into a deficit.
“The fearsome outcome is that growth slows as rising debt loads bite before deleveraging is complete in emerging countries,” Gilbert wrote. “In that event there are few growth engines left.”
GR-NEAM had $67.7 billion in unaffiliated assets under management as of March 31, according to its website. The Farmington, Connecticut-based unit primarily serves insurers.