Bond Boom Spreads to Poorest Countries -- WSJ

By Carolyn Cui and Manju Dalal Features Dow Jones Newswires

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (October 12, 2017).

Continue Reading Below

Investors' thirst for income is enabling governments and companies in some of the world's poorest countries to sell debt at lower and lower interest rates.

And the global bond boom has even reached Tajikistan.

The central Asian country last month raised $500 million in its first-ever international bond sale, paying just 7.125% in annual interest on the debt after the U.S.-dollar offering drew a swarm of American and European buyers. Bankers had earlier offered the 10-year bonds from the former Soviet satellite with an 8% yield.

Greece, which was on the brink of default a few years ago, issued new bonds this past summer, and the National Bank of Greece launched a bond sale Tuesday, marking the first visit of a Greek bank to the credit markets since the country's sovereign-debt crisis.

And June saw the bond-market debut of the Maldives, a tiny nation in the Indian Ocean that raised $200 million in a sale of five-year bonds with a 7% coupon.

Continue Reading Below

Speculative-grade bond issuance in the developing world has hit a record $221 billion this year, according to data from J.P. Morgan Chase & Co. and Dealogic, up 60% from the full-year total in 2016.

Buyers reason that the debt pays a healthy yield and carries few immediate risks. The global economy appears robust and emerging-market defaults are low. Bankers say they expect emerging markets to sell tens of billions of dollars in additional junk bonds by year-end.

The euphoria is worrying some investors, who warn that frenzied buying of risky assets sometimes presages market turning points. The average yield on speculative-grade corporate bonds in emerging markets dropped to 5.53% late last week, the lowest on record, according to J.P. Morgan. Two years ago, that yield was more than 9%.

"While I am not shouting the end is near, it is normally pretty far down the line that emerging markets start to see this type of euphoria," said Wilbur Matthews, principal at Vaquero Global Investments LP, a firm that specializes in emerging markets. He said he has been selling some riskier debt to buy higher-rated bonds and securities that mature sooner.

Tajikistan's bonds were rated B- by S&P, six notches below investment grade. The ratings firm estimated the country's per capita gross domestic product at $900, putting it among the lowest of the sovereign nations it rates, but said it sees Tajikistan's growth prospects improving gradually.

"Investors are very bullish on bonds from emerging markets and very keen to diversify into new names," said Peter Charles, a Citibank managing director who handled the Tajikistan bond sale. The country plans to use some of the proceeds to finance a power-plant project.

Some passed on the opportunity. Samy Muaddi, who manages a portfolio of emerging-market bonds at T. Rowe Price Group, said he didn't buy the Tajikistan debt because he lacked information about the country's repayment history and financial strength. "We are seeing a lot of aggressively priced deals, as many new entrants are coming to the market with less-established track records," he added. T. Rowe has about $16 billion in emerging-market debt.

Companies that previously struggled to raise money in the credit markets had no trouble doing so recently. Geo Energy Resources, an Indonesian coal-mining group, canceled a $300 million bond sale in July when investors were demanding a yield of close to 9%. In late September, the company returned to the markets and sold the bonds with an 8.3% yield.

And even issuers with a history of defaults have been able to find buyers for their debt. Argentina in June sold 100-year bonds, even though the South American nation has defaulted multiple times over the past few decades.

"We're at a part of the credit cycle globally that's really benign. Risk taking is really high," said Jay Wintrob, CEO of Oaktree Capital Management, during a recent visit to Hong Kong. Los Angeles-based Oaktree has $99 billion under management in corporate debt and other investments.

Prices of emerging-market junk bonds have gained sharply this year, pushing their "spreads," or the additional yield that investors demand over interest-rate benchmarks, to multiyear lows. That spread over U.S. Treasurys was just 3.48 percentage points at the end of last week, the tightest level in 10 years, according to J.P. Morgan. A year ago, the spread was 5.3 percentage points.

Buyers of such bonds have been collecting hefty returns. A J.P. Morgan index that tracks high-yield corporate bonds in the emerging markets has risen 9.2% this year through September, significantly outperforming U.S. junk bonds, which have returned 6.7% over the same period.

There are fundamental reasons why global investors are rushing into riskier emerging-market debt. Many companies are growing, their balance sheets are improving and default rates are at multiyear lows, said Fraser Lundie, a portfolio manager and co-head of credit at Hermes Investment Management in London, which has about $39 billion under management. Calmer energy and commodity markets also have reduced volatility in Asian companies' earnings.

Money continues to flow in. The Institute of International Finance said in a recent report that emerging-market bond funds are set to attract a net inflow of $242 billion in 2017, up from $102 billion last year.

But buyers of bonds issued by low-rated companies and countries in the emerging world could be exposed to multiple risks should markets turn, investors say.

In previous times of market stress and economic weakness, junk bonds and emerging-market debt were among the asset classes that suffered sharp price declines as investors dumped riskier holdings for safer ones. The recent tightening in spreads raises questions about whether investors are getting adequately paid for the risk they are taking on. A faster-than-expected interest-rate increase by the Federal Reserve could also hurt bonds broadly, because bond prices fall when rates and yields rise.

Polina Kurdyavko, co-head of emerging-market debt at BlueBay Asset Management, a fixed-income firm with $57 billion of assets under management, said she isn't worried yet. Junk-bond issuance, which makes up less than half of overall emerging-market debt supply, has so far been increasing proportionally to the broader sector.

"I'll start worrying when high yield dominates new bond issuance in emerging markets," she said.

--Steven Russolillo contributed to this article.

Write to Carolyn Cui at carolyn.cui@wsj.com and Manju Dalal at manju.dalal@wsj.com

(END) Dow Jones Newswires

October 12, 2017 02:47 ET (06:47 GMT)