The surge in demand for junk-rated sovereign debt is prompting comparisons with the most frenzied yield-hunting in emerging markets, but there are big caveats.
Recent bond sales in Africa show how investors are buying up riskier bonds as benchmark yields fall from their all-time highs on the prospect of U.S. interest rate cuts.
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Kenya, which is rated five notches below investment grade by S&P Global Ratings, has received orders for more than three times the $1.5 billion it launched on February 12. A week earlier, Benin's dollar-denominated bonds were oversubscribed by more than six times. So was Ivory Coast's sale in January, when the country issued the continent's first eurobonds since April 2022. Total sub-Saharan issuance has already exceeded Goldman Sachs Group Inc.'s forecast of $4.5 billion for the year.
“The last time we saw a yield-chasing epidemic like this one was around mid-2018,” said Peter C. Earle, senior economist at the National Bureau of Economic Research. At the same time, “the random emerging market bidders that we've seen for years are probably gone,” he said.
In the years before the pandemic, emerging-market and frontier borrowers attracted eager bond buyers as waves of central bank purchases and stimulus pushed nearly $16 trillion in government bonds into negative yields. Central Asia's poorest country, Tajikistan, epitomizes that bubble, attracting bids of more than $3 billion after a $500 million debut in 2017.
When the economy slumped during the coronavirus lockdowns in 2020 and 2021, a large number of debt defaults followed. Since 2020, there have been 14 defaults across nine different sovereigns, according to Fitch Ratings. This compares to his 19 defaults on her debts in 13 countries over the past 20 years.
Ghana was one of the last issuers to sell in March 2021 before investors became cautious, repaying its debt just over a year later.
Earle and other emerging market experts say a default loop is not expected this time around. The US Federal Reserve has finally begun to ease policy, creating an even more supportive backdrop for high-yield issuers.
“The main difference is the direction of U.S. interest rates,” said Charlie Robertson, head of macro strategy at FIM Partners UK in London. “Debt burdens are manageable if markets are ready to roll over the debt, and last month's problems show that Africa can do so.”
Sammy Mouadi, head of emerging markets fixed income at T. Rowe Price Associates, agrees.
“For developing countries, the easing of financial conditions and the resumption of market access are clearly positive,” he said.
“This gives us room to develop a more considered financial strategy.”
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Morgan Stanley analysts said Nigeria, Angola and El Salvador, whose bonds are due to mature in 2025, are the “top candidates” to be next in line. “External factors are changing in the right direction,” they write. “If we can issue it, it will be good for our credit.”
At the same time, investors are still willing to accept higher yields in developed markets. Given the returns on safer debt, we need to be more selective about emerging market and frontier assets, focusing on countries that are restraining spending or making progress on reforms.
Frank Bekaert, senior emerging market analyst at GimmeCredit, said investors are not thinking “I'll buy anything if the yield is high enough,'' but rather “I'll buy anything if the fundamentals are good and the yield is high.'' Stated.
Increased action by multilateral lending institutions such as the International Monetary Fund and the World Bank also reduced risks.
The Washington-based IMF has committed more than $50 billion to the region between 2020 and 2022. This is more than double his contributions in the decade since the 1990s.
Such support could also lower borrowing costs for recipients by creating a scarcity premium on bonds, said Shamaila Khan, head of emerging markets at UBS Asset Management.
“We're going to start to see more issuance from high-yield countries,” he said. “However, given the availability of additional funding from concessional sources, that amount will be significantly lower than historical levels.”
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