By Sujata Rao and Carolyn Cohn
LONDON, Sept 27 Investor appetite for yield has
fuelled record bond issuance by emerging market borrowers, and
the 2012 total is set to top $300 billion helped by some players
pre-financing next year's needs.
Bond markets are benefiting from two major initiatives
announced over the summer to boost economic growth in Europe and
the United States.
Firstly, the European Central Bank said it will "do what it
takes" to save the euro zone and then the U.S. Federal Reserve
announced a $40 billion per month stimulus programme.
Those moves underpinned government bond yields in developed
markets, with many near record lows. Emerging market debt has
drawn huge inflows this year because of those ultra-low yields
in some developed markets and high risks in others.
"Two percent yields on your (German) Bunds or U.S.
Treasuries does not cut it. People have money to invest in
high-yield markets," said David Dowsett, senior portfolio
manager at Blue Bay Asset Management.
"There is global demand for credit given low risk-free
interest rates and the diminishing number of risk-free
countries," he said.
All that has boosted issuance in dollars and euros in the
third quarter to around $94 billion, bringing the year-to-date
total to $291 billion by Sept. 27, according to data from Bank
of America/Merrill Lynch.
That beat the previous full-year record - $290 billion in
2010 - and saw BofA/ML lift its 2012 forecast to $314 billion
from $293 billion.
"We are in a very credit-friendly environment," said David
Hauner, head of EEMEA fixed income strategy at BofA/Merrill
Lynch Global Research.
"Growth is high enough for debtors to pay their bills but
low enough to maintain extremely low interest rates and keep
investors doubtful of equities. So, it is a perfect world for
Marc Balston, emerging debt strategist at Deutsche Bank,
said sovereign issuance - $67.6 billion so far - would set a new
record as countries pre-finance 2013 borrowing needs.
Emerging debt funds have lured flows of over $21 billion
this year, according to Boston-based fund tracker EPFR Global,
of which more than $16 billion has gone to dollar debt.
JP Morgan, which compiles the most widely used emerging debt
indices and tracks a wider investor set, puts inflows at $50
billion this year, compared with a 2011 total of $43 billion.
Returns on sovereign dollar bonds top 10 percent on JP
Morgan's EMBI Global index 11EML.
GRAPHIC-Asset performance: link.reuters.com/muc46s
Issuance is running 25 percent above year-ago levels, driven
by the appeal of higher-yielding debt in a world where
safe-haven bonds from Germany and United States bear tiny or
even negative yields, while other countries in the once-safe
euro zone carry lower debt ratings than many emerging economies.
In the Middle East, cash-rich investors have driven a boom
in Islamic bond, or sukuk, sales, encouraging Turkey to foray
into the market for the first time.
Demand has been such that recent sukuks have generally been
more tightly priced than conventional bonds.
A continuing feature is the surge in corporate issuance,
which accounts for three quarters of this year's total. A second
aspect is the demand for lower-rated sovereigns, many of which
have successfully tapped markets or are preparing to do so.
JP Morgan earlier this month upped 2012 corporate issuance
forecasts to a record $255 billion.
Investors are finding corporate and frontier bonds
attractive because spreads for more traditional emerging
borrowers have tightened sharply over U.S. Treasuries.
Spreads on JPMorgan's benchmark EMBI Global index are at the
psychologically key 3.00 percentage points level 11EML, having
fallen more than 1.20 points this year. Names such as Brazil or
Russia offer even smaller premiums to U.S. Treasuries.
JP Morgan sees the index ending the year at 2.75 points.
"Credit spreads in high-quality sovereigns have compressed
to levels which hardly leave room to compensate for risks,"
Barclays Capital strategist Andreas Kolbe said.
He suggested moving down the risk spectrum to buy slightly
higher-yielding sovereigns such as Croatia and Romana, as well
as low-investment grade corporates.
Even troubled sovereigns such as Ukraine have managed to
issue debt, while Zambia's $750 million debut bond attracted
bids 15 times that level. Frontier borrowers Bangladesh, Costa
Rica and Morocco are among those expected to issue this year.
There have also been reminders that emerging debt does not
come without risks. Ivory Coast debt has enjoyed a huge rally
this year due to the resumption of coupon payments following a
2011 default, but the West African borrower has yet to make
three missed payments.
In the Caribbean, Belize is in the midst of a debt
restructuring and analysts said initial proposals have not been
Others may follow Belize's lead, said Stuart Culverhouse,
chief economist at frontier markets broker Exotix.
He told a conference on Friday: "There are implications for
other Caribbean sovereigns -- low growth in Jamaica, Grenada,
Barbados may encourage these countries to take a similar
approach to their own debt."
(Editing by Dan Lalor)
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Keywords: EMERGING DEBT/ISSUANCE
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