Montreal, Canada

The world's savviest bond investors are raising their allocation to emerging market corporate bonds this spring.

Based in Orange County, California, PIMCO, a unit of Germany's Allianz Insurance, is run by two pretty smart guys. Bill Gross and Mohamed El-Erian dictate global asset allocation for the giant $1 trillion dollar outfit – the largest in the world.

Gross has a stupendous long-term track record that has outpaced the S&P 500 Index with considerably less risk. El-Erian came to PIMCO a few years ago after running Harvard's endowment fund.

Emerging market bonds of all stripes have been in a secular bull market since prices hit a bottom in late 1998. Prior to the low, marked by the nadir of the Russian rouble devaluation, the Russian GKO debt default and the Asian economic crisis, emerging market government bonds posted big gains from 1993 to 1997. In fact, no other segment of the global bond universe has done better than emerging market bonds over the last 20 years.

However, benchmark yields on the J.P. Morgan Emerging Markets Bond Index trade at just 6.32%, just 12 basis points above its 52-week low. Emerging market government bonds now yield just 260 basis points more than benchmark Treasury bonds. In many respects, they should be trading at such levels because most major economies are saddled with high deficits while the largest emerging markets have trade surpluses and low relative debt levels.

Still, it's hard to make a case for chasing emerging market government bonds now. Brazilian paper, among the largest tranche of the index and the most liquid, are in the midst of a massive bull market with yields barely 100 basis points above Treasury bonds. That's no bargain.

Investors have noticed. Year-to-date, mutual fund inflows into emerging market bond funds have hit a record $11.6 billion dollars – way above the previous record of $9.7 billion for all of 2005.

But emerging corporate bonds are another story. At least PIMCO thinks so.

PIMCO believes that outsized economic growth and lower ratios of debt-to-GDP than those industrialized countries should draw more investors to emerging market corporate bonds. "Emerging markets are going to increasingly become part of a core fixed-income allocation for investors where, in the past, emerging markets have been regarded as risky or exotic, an optional part of people's portfolio," claims PIMCO emerging markets portfolio manager, Ramin Toloui.

PIMCO's emerging market bonds funds and global strategy funds have been boosting allocations to state-owned energy companies and financial bonds. They've also purchased emerging market bonds in the natural resource space outside of oil and gas and infrastructure sectors. These bonds have higher relative yields than sovereign or government debt and probably, greater potential for capital appreciation at this stage of the economic cycle.