EMERGING MARKET BONDS, nearly all observers agree, have risen about as far as they can go. With spreads at these levels, the chances of significant capital appreciation are minimal; the best that investors can hope for is that there won't be much widening for the rest of the year.
In such an environment, where analysts on both the buy side and the sell side foresee a total return for emerging-market debt in the region of zero, investors are inevitably going to look to other methods of beefing up their yields. Foremost among those is leverage.
There are no hard figures on the amount of leverage in the asset class; such things are impossible to measure. But total volumes have been growing steadily and, anecdotally speaking, investors and analysts say that there's nearly as much leverage now as there was in 1997-98, just before Russia and Long Term Capital Management dragged the market down precipitously.
Players today – foremost among them the dozens of small emerging-market hedge funds that have been set up in the past couple of years – aren't as large as LTCM was, and don't therefore constitute the same kind of systemic risk.