By Carolyn Cohn
LONDON May 3 Last summer, euro zone member Spain was struggling to borrow money for 10 years at a yield below 7 percent. Last week, Rwanda had no trouble.
Rock-bottom interest rates in the developed world have left investors scrambling for yield, while economies in the developing world are eager to raise capital to boost their economies and reduce their dependence on international aid.
The result in the past few years has been a frenzy of unfamiliar names issuing dollar debt, and finding huge demand.
Investors may regard any kind of debt as a safer harbour than equities, shrugging off specific country risk.
Latest was Rwanda, still recovering from the 1994 genocide. Orders for the East African country's debut dollar bond last week reached $3.5 billion, more than 8 times the bond's issue size.
"In a market where you constantly get burnt trading fundamentals, traders are going to the other extreme, ignoring fundamentals and just looking for yield," said Manik Narain, emerging markets strategist at UBS.
"It's really reaching bubble-like proportions."
Single-B rated Rwanda issued dollar debt at a yield of 6.875 percent, paying not much more than euro zone member Slovenia, which issued 10-year debt on Thursday at 6 percent.
Rwanda's yield is below the 7 percent threshold which investment grade-rated Spain briefly breached last July, before the European Central Bank's OMT bond-buying plan helped to dampen yields.
And Rwanda is not alone. Other debut or infrequent borrowers to issue debt in the last two years span the continents, including Bolivia, Nigeria, Mongolia and Zambia. Bolivia issued a 10-year bond at 4.875 percent. Zambia paid 5.625 percent.
Bangladesh and Papua New Guinea are expected to issue maiden dollar bonds soon, while previous borrowers such as Panama have been adventurous in maturity, issuing a 40-year bond last week.
With the Bank of Japan the latest developed world bank to print money, keeping official rates and yields at low levels, it doesn't take much to make the yield attractive on a frontier market bond.
"You add a spread for liquidity or ratings, you are still looking at borrowing costs of 6-7-8 percent. That's affordable," said Stuart Culverhouse, chief economist at frontier markets broker Exotix.
"Yields are so low because policy rates are so low."
Exotix estimates 35 frontier sovereigns have issued dollar or euro debt since the start of 2012 totalling $32 billion, including at least nine first-time borrowers.
Investors such as pension funds looking to cover liabilities are finding that even mainstream emerging market debt is yielding on average below 5 percent, near record lows, according to JP Morgan's widely-watched emerging sovereign bond index.
Investors are also slowly increasing their allocations for emerging markets, to match their share of global growth.
Goldman Sachs predicts developed markets' share of global GDP to shrink to 31 percent by 2050, from 63 percent in 2011.
"Sources of capital have had a rotation into emerging markets and by extension frontier markets, that has been playing out for the last couple of years and may be expected to continue," said Culverhouse. "Many people like the story."
Outstanding emerging market government and corporate debt is currently estimated at around $10 trillion, a fraction of the $100 trillion estimated for the global bond market.
Frontier debt is also finding buyers because of supply shortages due to overall redemptions of debt by more conventional emerging market borrowers.
JP Morgan forecasts sovereign issuance for global emerging market borrowers at $80 billion this year, but that figure drops to $11 billion on a net basis, more than three quarters of which is frontier debt.
And as aid budgets come under pressure in many developed markets, poor countries are looking elsewhere for funds which also have the advantage of coming without strings attached.
"This is a world where people love yield," said Angus Halkett, fund manager at Stone Harbor Investment Partners.
"There are people who are borrowing who should not be borrowing. Whenever markets in general are doing well, everyone can do well. It's only when the market goes down that you realise who is good and who is not."
Rwanda's debt is currently trading around issue price, even though the bond's $400 million size means it is ineligible for JP Morgan's emerging bond indices, against which $560 billion of assets are benchmarked.
Some of the exotic borrowers have done better than others. ()
Zambia launched its debut dollar bond to much fanfare last year, with bids worth more than 15 times the amount on offer, but the bond has fallen in value. Investors cite tight pricing on the bond and a deteriorating economic outlook.
Bolivia, which is already planning a second bond six months after the launch of its first in 90 years, has seen that bond spend much of the time trading below issue price.
"We did not get involved with Bolivia, it was just way too expensive, especially for a country that has a history of expropriating assets," said Kevin Daly, fund manager at Aberdeen Asset Management. "Why would you lend them money at 5 percent?"
The price of debt for the smallest economies still depends on the headlines out of the biggest ones.
Recent weaker economic data from the United States pushed down U.S. Treasury yields and delayed expectations for a withdrawal of quantitative easing - a liquidity lifeline that has encouraged flows into higher-yielding emerging markets.
An upward reversal in the U.S. economy's fortunes could leave frontier debt vulnerable to that loss of funds.
Many frontier bonds sold off sharply earlier in the year when the news from the United States and China was more encouraging.
Graham Stock, strategist at Insparo, pointed to fears that African debt, for example, "would prove to be relatively illiquid if there were a mass exit from emerging markets".