Portfolio Design: A Modern Approach to Asset Allocation

EMERGING MARKET BONDS—A BRIEF HISTORY

Emerging market bonds have been around for two centuries at least. But most investors consider them a new asset class. The reason is that they almost entirely disappeared for more than 50 years. From the 1930s to the late 1980s, very few emerging market bonds were issued because investors had suffered too grievously from defaults in the 1930s.

There is a long tradition of defaults on emerging market bonds. The expectation has always been that some bonds will go into default because they had done so often in the past. In the late nineteenth century, emerging economies like those of Argentina, Brazil, South Africa, and China regularly raised capital in London and Paris by issuing bonds. So did the emerging economy of the United States. Most of these bonds were denominated in pounds or French francs rather than in local currency. With fairly regular, but unpredictable frequency, these bonds would go into default. An example was the Argentina default that occurred during the Baring Brothers Crisis of 1890. The crisis began with a financial panic in Argentina, but soon affected the bond markets of other emerging economies such as the United States, and led to the collapse (and subsequent rescue by the Bank of England) of Barings Brothers itself, a long-established merchant bank in London.

When issuing bonds, most governments did not plan to default on their bonds. In fact, they often went to great lengths to avoid default. An example is the 1904 ...