LONDON Governments and companies from the developing world are increasingly turning to euro debt markets, lured by the falling costs of borrowing there and European investors' clamour for relatively higher returns.
Romania sold a 10-year euro-denominated bond on Tuesday yielding 3.625 percent, following on the heels of Turkey which last week raised 1 billion euros via a nine-year bond at a 4.2 percent.
And earlier in the year, Brazil and Israel tapped euro debt for the first time in eight and four years respectively.
The Turkish deal, despite political and economic troubles in the country this year, was six times subscribed, with German funds snapping up 40 percent of it. Other buyers were from Poland, Britain, Italy and Netherlands, according to the Thomson Reuters capital markets information service IFR.
These are only the latest of many euro deals to hit the market this year.
According to Thomson Reuters data, euros have accounted for more than a third of emerging market issuance in hard currency so far in April.
Emerging states and companies issued more than $21 billion worth of debt in euros in the first quarter of 2014 - almost 20 percent of the total - up from just over 12 percent in the last quarter of 2013 and just 7 percent a year ago.
There are several factors behind the shift.
European fund managers have a natural preference for euro assets and are faced these days with frustratingly low yields across the single currency bloc.
"If you are a European asset manager these days you have a problem getting any yield, and if you hold core Europe, you stand to lose money," said Jeremy Brewin, head of emerging debt at ING Investment Management.
"There is preference for investment grade euro assets with higher yields. Our high-yield euro fund would like a broader sweep of issuance so they could have more diversity."
Bond yields in southern Europe, the euro zone's periphery, are seemingly in freefall, with 10-year Spanish bonds yielding just 3 percent, or almost half of year-ago levels. In so-called core euro economies such as Germany and France, 10-year yields are even lower, 1.5-2.0 percent.
That makes it hard to ignore the 4 percent-plus coupon income that an investment grade credit such as Turkey offers.
Emerging bonds in euros are also seen as safer from the expectation of rising yields in U.S. treasuries as the U.S. Federal Reserve winds down its $10 billion per month money-printing plan.
Emerging bonds usually trade based on a yield premium above a more stable asset. For dollar denominated bonds, that benchmark is U.S. treasuries, and many investors expect yields on treasuries to rise sharply over the next year, pushing down the value of debt in dollars.
Many expect German Bunds, the benchmark for debt in euros, to be more stable, especially if the European Central Bank begins its own asset-buying programme like the one the Fed is winding down.
"If you believe Bund yields don't need to rise as much, you may be inclined to see this as an additional reason to buy euro-denominated paper, as you won't be subject to volatility associated with rising yields on the underlying curve," he said.
The flood of euro issuance from emerging markets may not please everyone though - the ECB is concerned about the single currency's strength and one reason for it is the cash that is flowing into European stock and bond markets.
The divergence in U.S. and European monetary policy and bond yields makes euro debt attractive to borrowers too. For one, ECB policy is likely to weaken the euro - a Reuters poll forecasts it to fall 7 percent in the coming year.
The dollar, by contrast, looks headed higher, potentially saddling borrowers in the currency with higher coupon and repayment costs in future.
Also, as Bund yields have fallen, so have euro-denominated borrowing costs. Turkey's 4.2 percent cost for its 9-year euro cash compares favourably to a 10-year $2.5 billion deal that cost it 5.85 percent in January.
Another incentive to borrow in euros can be found in the derivatives market. The euro-dollar cross currency basis swap - the cost of swapping future payments at benchmark interest rates in euros for payments at dollar benchmark rates - is negative.
That means issuers who plan to service debt with an income stream in dollars can borrow in euros and be compensated for the currency and interest rate risks.
"The headline coupon is cheaper in euros because of the yield differential between Bunds and Treasuries, but some issuers will have to swap into dollars and that's also one of the factors they will look at," said Eric Cherpion, global head of DCM syndicate at Societe Generale.
"On a swapped basis there is compelling arbitrage opportunity for the issuer," he added.
Investors appear to agree that emerging euro debt is a good bet. Nomura said Romania's new euro bond was attractive compared with euro zone credits such as Portugal and Spain.
"Our bias would be to buy this bond in our portfolio ... because we expect that over time the euro curve will outperform the dollar," Nomura said in a note.
It expected the bond to attract investors looking to enhance returns, particularly with ECB asset-buying a possibility.
NOT FOR ALL
However, the euro is nowhere near displacing the dollar's hegemony in emerging bond markets. Not only is the greenback the world's most liquid currency by far, but also a dollar bond can be eligible for inclusion in indices such as JPMorgan's EMBI Global or CEMBI, which are tracked by funds managing hundreds of billions of dollars.
The euro debt market is so far open only to investment grade-rated, frequent issuers, says SocGen's Cherpion. Lowly rated or debut issuers, from Africa for instance, are unlikely to find takers.
But the euro's share will nevertheless rise, fund managers and investment bankers in charge of bond deals predict.
While a stronger greenback could remove the arbitrage opportunity in the euro-dollar swap market, Cherpion of Societe Generale sees emerging borrowers' expansion in euro markets as a structural rather than tactical shift, as bond buyers as well as sellers diversify their operations.
(Additioanl reporting by Anirban Nag and IFR reporters; Editing by Peter Graff)