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
"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
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
"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
"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
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".