Governments and companies in developing nations borrowed on foreign markets at a record pace in early 2021, but investors say the risks are mounting as some countries endure a resurgence of coronavirus.

Borrowing through eurobonds — debt issued overseas, mostly in dollars, euros and yen — reached a new quarterly peak in the three months to March, with fundraising reaching $191bn, according to data from Dealogic and Moody’s Investors Service.

The increase in issuance in the first quarter was especially strong among borrowers rated below investment grade, the data show, suggesting buoyant demand for riskier assets.

“Supply and demand are both in play,” said Atsi Sheth, global head of emerging markets at Moody’s. “On the supply side, there is an increased need for finance at the government and corporate level in emerging markets and, on the demand side, global financial conditions are still quite liquid and there is still money seeking returns.”

But with many developing countries battling a resurgent virus, and bond yields having jumped from the beginning of 2021, the number of potential pitfalls for EM assets has increased, analysts and investors say.

Column chart of Combined sovereign and corporate issuance from emerging markets, $bn showing EM eurobond issuance at record high in first quarter of this year

The IMF this month raised its forecasts for global growth this year and next, but warned of “divergent recoveries”, with large parts of the developing world faring less well than advanced economies and, in some cases, worse than previously expected.

India’s currency has tumbled as a new and ferocious wave of coronavirus threatens its recovery. The country set a grim milestone on Wednesday, reporting a world record of 315,000 new coronavirus infections, surpassing the US peak earlier this year.

Brazil’s economy, previously expected to ride a wave of demand for its exports from China, instead risks being derailed again as its leaders push back against lockdowns and the virus spreads unchecked. Death rates have also jumped back again in central and eastern Europe.

“Pandemic containment is definitely key to recovery and many of the large emerging markets are not there,” Sheth said.

Financial conditions, too, are changing. After a rapid, large-scale dash out of emerging market assets at the onset of the pandemic, investors returned in a rising flood, with the election of Joe Biden as US president last November and the rollout of vaccines in developed markets helped to drive a broad rally in risk assets into this year.

At the start of 2021, said Phoenix Kalen, emerging market strategist at Société Générale, “we were still in that space where things looked quite benign”. EM currencies were holding up, inflation and US bond yields had yet to pick up and many finance ministers and corporate treasurers in emerging markets were able to take advantage of attractive yields to retire older, more expensive debt.

Since then, however, US bond yields and inflation expectations have risen, and inflationary pressures have bubbled up around the developing world — partly, for many countries, as a consequence of currency weakness.

“Going forward, things will become more tricky,” Kalen said. With volatility returning to currency markets, “finance ministers will be reluctant to issue in foreign currency and leave themselves vulnerable to currency fluctuations”.

Pockets of more severe risk are emerging. Brazil’s government, in particular, has borrowed on its domestic market at much shorter maturities than before the pandemic, raising the possibility that it could struggle to refinance its debts if growth fails to take off this year.

“Brazil really stands out,” said Tatiana Lysenko, lead emerging market economist at S&P Global Ratings. “It definitely has the greatest rollover risk because of its short-term debt.”

Some analysts warn that emerging markets may struggle to recover, even where the virus has been more successfully contained.

Arend Kapteyn, UBS chief economist, says the “massive switching effect” that will happen as households come out of lockdown and start spending more on services and less on goods, will work against emerging markets.

“For EMs, we say if anything they will be hurt by this,” he said. “If anyone has benefited [from the pandemic-induced growth in goods trade] it is in Asia, and as it is undone, they would presumably lose.”

For emerging market fixed income investors, says Bhanu Baweja, UBS strategist, it will be “much harder work from now on”, as emerging market yields move higher still than those in advanced economies.

“Most of the things that drive [bond] prices higher — spread compression, high commodity prices, the pick-up in global trade — all these things are done. From now on, credit spreads are not going to get tighter but wider.”

Analysts say the longer-term threats are also sharpening. Many sovereign borrowers came into the pandemic with severe imbalances that have only been exacerbated. While previous crises have spurred reform in some cases, this looks unlikely this time, Lysenko said.

“In this crisis, I don’t think we have seen that momentum,” she said. “On the contrary, we are more concerned that reforms that were in the pipeline may be delayed.”