At first glance the link in investors' minds between the two asset classes does display arbitrariness. If investors can't distinguish between Palm Pilots and palm oil what hope is there for eYcient capital allocation? Deeper investigation, however, suggests portfolio managers are not that muddle-headed.
What tech stocks and developing country bonds have in common is many new speculative-grade issuers, valuation problems and a growing default rate. The main diVerence is that until recently investors were wildly optimistic about growth prospects for tech stocks and deeply pessimistic about emerging markets. Now they seem to be saying that both are unpredictable and they need help to Wgure them out. This will take time - for credit histories to be built and for better techniques for using the information to be devised.
That's because the markets for tech stocks and for sovereign bonds, in their present form, are fairly new. Even though sovereign issuance of foreign currency bonds Wrst became substantial in the 1820s, the present wave of issuance by speculative grade governments only began in the 1990s, when Mexico issued Brady bonds in exchange for bank debt in default. Since then other countries have taken the Brady route and many speculative as well as unrated credits have issued international bonds.