The publication of the results triggered a sharp rally in Petrobras’s dollar-denominated bonds. It also caused a significant tightening in the spreads on Latin American hard currency corporate debt which, according to JP Morgan, was the best-performing segment of the bank’s benchmark corporate EM bond index (CEMBI Broad) last week.

So far this year, returns on EM external corporate bonds - more than 85 per cent of which are denominated in dollars - stand at nearly 5 per cent, compared with nearly 4 per cent for US high-yield (or “junk”) bonds and 3 per cent for the benchmark S&P 500 equity index.

Yet beneath the surface of favourable sentiment towards EM corporate debt, there are serious concerns about the asset class.

The combination of a dramatic increase in the size of the market since the eruption of the global financial crisis - at $1.7 trillion, the EM hard currency corporate debt market is as big as its global high-yield counterpart and is now larger than the US junk bond market - and a significant deterioration in credit quality over the past several months is sounding alarm bells at a time when EMs are suffering sizeable capital outflows.

Of particular concern are the countries and sectors which have led the rapid growth in EM corporate bond issuance since 2011. According to a report from JP Morgan, China replaced Brazil last year as the developing country with the largest amount of hard currency corporate debt outstanding.

At the end of April, Chinese companies’ hard currency debts amounted to $260 billion, up from less than $50 billion in 2011. Russian firms’ external debts, meanwhile, are the fourth largest in the EM space, while dollar-denominated corporate debt in Turkey - another vulnerable developing economy - have surged from just $6 billion in 2011 to nearly $40 billion, according to the report.

More troublingly, Russian banks and Chinese property companies have the largest amount of dollar-denominated debt outstanding, with the latter now constituting the largest country sector in the CEMBI.

If the woes of Kaisa, the Shenzen-based real estate developer, are a foretaste of things to come, then the EM hard currency corporate bond market is in for a rough ride.

Last week, Kaisa became the first Chinese property group to default on its dollar-denominated bonds, focusing attention on the record levels of external debt issued by Chinese real estate developers in the face of a downturn in the country’s housing market.

The fact that dollar issuance by Chinese developers fell sharply in the first quarter of this year - normally a period of intense activity - could be the canary in the coal mine.

Russian banks (many of which are now rated non-investment grade along with the sovereign) are also vulnerable. This is because of the dire state of the country’s economy and the fallout from a much tougher western sanctions regime - imposed on Russia as part of the standoff between Moscow and the West over the conflict in Ukraine - that makes it difficult for lenders to issue stock or debt in western capital markets.

While there have been no defaults so far, Russian corporate bond spreads remain the widest in the CEMBI and, while having narrowed sharply this year as part of a dramatic improvement in sentiment towards Russia, are likely to remain elevated in the absence of a resolution to the conflict in Ukraine.

Not surprisingly, the outlook for the EM hard currency corporate debt market hinges critically on the direction of the dollar. For the time being, the greenback’s resurgence has been stopped in its tracks, with the euro strengthening nearly 6 per cent against the dollar since mid-April and many EM currencies - in particular the Russian rouble - rising again.

Yet even though investors are pushing back their expectations regarding the timing of the first hike in US interest rates, sentiment towards EMs remains fragile.

The currency of Turkey, one of the most vulnerable EMs, has lost a further 4 per cent against the dollar since the end of March. With dangerously high levels dollar-denominated corporate debt falling due in the next year or so, there are ample reasons for concern.

Nicholas Spiro is managing director of Spiro Sovereign Strategy