(Corrects spelling of Salman Ahmed in para 24)
* Investors seek higher yields in frontier debt markets
* Buyers flock to debut Kenya dollar bond despite attacks
* Developed economy yields have risen less than some hoped
* Market seems to have short memory after past setbacks
By Carolyn Cohn
LONDON, June 17 Investors are returning to the
riskier, less developed bond markets of Africa and other
frontier economies, burying memories of past setbacks and
plunging in after global yields failed to rise as much as
Ignoring attacks by Somali-linked Islamic militants in a
Kenyan coastal town which killed at least 50 people, they
flocked to the country's debut dollar bond this week,
The $2 billion issue - sub-Saharan Africa's largest dollar
frontier market bond - was seven years in the making but
investors said the timing was right for the junk-rated sovereign
Stuck for a place to find yield, they are targetting
frontier markets - a tier below the larger, more established
emerging economies - in Africa as well as Asia, eastern Europe
and Latin America.
"There is so much risk appetite; people are being pushed
into anything that has yields," said Antoon de Klerk, fund
manager at Investec Asset Management. "It seems that the market
has quite a short-term memory."
U.S. Treasury yields have not risen as high as many
predicted a year ago, when then-Federal Reserve chairman Ben
Bernanke hinted the central bank would reduce its bond-buying.
This programme, designed to boost the U.S. economy, had kept
yields depressed and encouraged investors to move funds into
emerging markets for better returns. The prospect that the
purchases would be wound down prompted an emerging market
sell-off last year, but this has partly unravelled as investors
now adapt to the reality of life without Fed support.
At the same time, central banks in Japan and the euro zone
are making sure yields stay low in their bond markets to
stimulate their own economies.
All this has increased the attraction of frontier markets.
The 10-year portion of Kenya's two-part bond yielded less than 7
percent, but this compared with 2.6 percent on U.S. Treasuries
, 1.35 percent on German Bunds and a
measly 0.6 percent on Japanese government bonds.
Even the average yield for emerging market debt is little
more than 5 percent.
SUDDENLY, LAST SUMMER
Fund managers say Kenya has a positive growth and monetary
policy outlook, making it an attractive investment proposition,
despite the attacks that are hitting tourism. Militants killed
at least eight more people in a second night of attacks on
Kenya's coast, officials said on Tuesday.
"Security is a concern but it's not a showstopper," said de
Other upcoming frontier bonds include possible issues from
Ecuador, El Salvador and Ethiopia. But bets on high-yielding
frontier debt haven't always paid off.
Shortly before Bernanke changed the investment landscape,
Rwanda came to the market last April with a small debut 10-year
dollar bond, also at a yield of less than 7 percent.
The bond's yield rocketed to 9 percent within weeks as
Western investors took their money back home, where yields were
rising and the outlook was safer.
Bonds from Ghana and Zambia also suffered in the months
after their launch. Ghana has a widening budget deficit and
rising debt, while falling copper prices have hurt top copper
(For GRAPHIC on African dollar debt performance, see link.reuters.com/set57v)
Specialist fund managers say it is important that investors
discriminate between country risks, rather than buying a bond
for its yield, regardless of its domestic policies.
Nigeria, for example, has outperformed other African dollar
debt, as investors focus on the recalculation of its Gross
Domestic Product which made it Africa's largest economy.
Yet the renewed enthusiasm for all things high-yield means
Zambia managed to issue a second dollar bond this year,
admittedly with a fatter yield than before, and frontier bond
yields have subsided from their highs.
"It's a pretty good time for the Kenyans to come to the
market - six months ago they'd have been paying a lot more,"
said Kevin Daly, emerging debt fund manager at Aberdeen Asset
Kenya's $2 billion bond attracted more than $8 billion in
orders, over four times the issue size. However, this was well
below the bubble territory of previous years, such as the 15
times oversubscription of Zambia's debut $750 million bond in
But frontier debt market returns of 9 percent this year and
spread levels at their tightest in a year suggest to some that
there may not be too much more upside.
Local currency debt, in contrast, has been underperforming
emerging and frontier dollar debt this year.
Salman Ahmed, global fixed income strategist at Lombard
Odier, pointed to local debt yields in investment grade-rated
India of 8.5 percent, comparing favourably with Kenya's
dollar-based yields. "Frontiers are facing ... much higher
yields in emerging market local currency," he said.
Such debt also carres a lower risk of default than the likes
of Argentina. President Cristina Fernandez has vowed to find a
way to service Argentina's restructured debt despite suffering a
major setback in a long legal battle against "holdout"
For borrowers such as Ecuador - which selectively defaulted
on its debt in 2008 but was on a roadshow for new debt last week
- the issue is not so much about "can't pay" as about "won't
Ecuador's previous unwillingness to repay its debt even when
it could may deter investors, however hungry they are for yield.
Here their memories do seem long enough to remember the default.
"Ecuador has demonstrated a poor record in repaying debt,"
said Colm McDonagh, head of emerging market fixed income at
Insight Investment. "How do you price that risk?"
(Additional reporting by Sujata Rao; editing by David Stamp)