By (Reuters)
Last summer, euro zone member Spain was
struggling to borrow money for 10 years at a yield below 7 per cent.
Last week, Rwanda had no trouble.
Rock-bottom interest rates in the developed world
have left investors scrambling for yield, while economies in the
developing world are eager to raise capital to boost their economies and
reduce their dependence on international aid.
The result in the past few years has been a frenzy of unfamiliar names issuing dollar debt, and finding huge demand.
Investors may regard any kind of debt as a safer harbour than equities, shrugging off specific country risk.
Latest was Rwanda, still recovering from the 1994
genocide. Orders for the East African country's debut dollar bond last
week reached $3.5 billion, more than 8 times the bond's issue size.
"In a market where you constantly get burnt
trading fundamentals, traders are going to the other extreme, ignoring
fundamentals and just looking for yield," said Manik Narain, emerging
markets strategist at UBS.
"It's really reaching bubble-like proportions."
Single-B rated Rwanda issued dollar debt at a
yield of 6.875 per cent, paying not much more than euro zone member
Slovenia, which issued 10-year debt on Thursday at 6 per cent.
Rwanda's yield is below the 7 per cent threshold
which investment grade-rated Spain briefly breached last July, before
the European Central Bank's OMT bond-buying plan helped to dampen
yields.
And Rwanda is not alone. Other debut or infrequent
borrowers to issue debt in the last two years span the continents,
including Bolivia, Nigeria, Mongolia and Zambia. Bolivia issued a
10-year bond at 4.875 per cent. Zambia paid 5.625 per cent.
Bangladesh and Papua New Guinea are expected to
issue maiden dollar bonds soon, while previous borrowers such as Panama
have been adventurous in maturity, issuing a 40-year bond last week.
With the Bank of Japan the latest developed world
bank to print money, keeping official rates and yields at low levels, it
doesn't take much to make the yield attractive on a frontier market
bond.
"You add a spread for liquidity or ratings, you
are still looking at borrowing costs of 6-7-8 per cent. That's
affordable," said Stuart Culverhouse, chief economist at frontier
markets broker Exotix.
"Yields are so low because policy rates are so low."
Exotix estimates 35 frontier sovereigns have
issued dollar or euro debt since the start of 2012 totalling $32
billion, including at least nine first-time borrowers.
Emerging allocations
Investors such as pension funds looking to cover liabilities are
finding that even mainstream emerging market debt is yielding on
average below 5 per cent, near record lows, according to JP Morgan's
widely-watched emerging sovereign bond index.
Emerging allocations
Investors are also slowly increasing their allocations for emerging markets, to match their share of global growth.
Goldman Sachs predicts developed markets' share of global GDP to shrink to 31 per cent by 2050, from 63 per cent in 2011.
"Sources of capital have had a rotation into
emerging markets and by extension frontier markets, that has been
playing out for the last couple of years and may be expected to
continue," said Culverhouse. "Many people like the story."
Outstanding emerging market government and
corporate debt is currently estimated at around $10 trillion, a fraction
of the $100 trillion estimated for the global bond market.
Frontier debt is also finding buyers because of
supply shortages due to overall redemptions of debt by more conventional
emerging market borrowers.
JP Morgan forecasts sovereign issuance for global
emerging market borrowers at $80 billion this year, but that figure
drops to $11 billion on a net basis, more than three quarters of which
is frontier debt.
And as aid budgets come under pressure in many
developed markets, poor countries are looking elsewhere for funds which
also have the advantage of coming without strings attached.
"This is a world where people love yield," said Angus Halkett, fund manager at Stone Harbour Investment Partners.
"There are people who are borrowing who should not
be borrowing. Whenever markets in general are doing well, everyone can
do well. It's only when the market goes down that you realize who is
good and who is not."
Rwanda's debt is currently trading around issue
price, even though the bond's $400 million size means it is ineligible
for JP Morgan's emerging bond indices, against which $560 billion of
assets are benchmarked.
Some of the exotic borrowers have done better than others.
Zambia launched its debut dollar bond to much
fanfare last year, with bids worth more than 15 times the amount on
offer, but the bond has fallen in value. Investors cite tight pricing on
the bond and a deteriorating economic outlook.
Bolivia, which is already planning a second bond
six months after the launch of its first in 90 years, has seen that bond
spend much of the time trading below issue price.
"We did not get involved with Bolivia, it was just way too
expensive, especially for a country that has a history of expropriating
assets," said Kevin Daly, fund manager at Aberdeen Asset Management.
"Why would you lend them money at 5 per cent?
The price of debt for the smallest economies still depends on the headlines out of the biggest ones.
Recent weaker economic data from the United States
pushed down U.S. Treasury yields and delayed expectations for a
withdrawal of quantitative easing - a liquidity lifeline that has
encouraged flows into higher-yielding emerging markets.
An upward reversal in the U.S. economy's fortunes could leave frontier debt vulnerable to that loss of funds.
Many frontier bonds sold off sharply earlier in the year when the news from the United States and China was more encouraging.
Graham Stock, strategist at Insparo, pointed to
fears that African debt, for example, "would prove to be relatively
illiquid if there were a mass exit from emerging markets".
No comments :
Post a Comment