Investors venture into emerging markets’ debt

In their hunt for yield, some investors have been venturing into offerings as exotic as Tajikistan’s sovereign bond or Iraq’s first sovereign debt sale without US backing in more than a decade only to find out that even those are pricey and hard to get.
Even as emerging markets bonds lost some ground in recent weeks in the secondary market, primary offers from Panamanian bank Multibank Inc, the Bahamas, and a 30-year Nigerian bond have been well oversubscribed, following a trend of lower sovereign and corporate yields.
The sellers’ market is good news for emerging market borrowers, giving them access to funds at rates once afforded only to “investment grade” issuers. But it could lead to mispricing of riskier assets and threaten valuations in the long-term by encouraging borrowers to cut coupons on future issues.
Right now it is forcing some funds to scale back.
Samy Muaddi, a portfolio manager of T Rowe Price’s Emerging Markets Corporate Bond Fund, said he has reduced his purchases of initial bond offerings as 2017 has progressed.
“We have been more selective in our new issue participation rate for single B credit including Latin American airlines and Chinese real estate,” he said.
Fund managers prefer new issues, particularly on corporate debt or debt issued by countries without a solid repayment history, because they typically sell at a discount to the secondary market. That has not been the case recently, Muaddi said, noting that the percentage of new issues in his fund has dropped from about 20 per cent of purchases to 12-15 per cent.
Asset managers of dedicated emerging markets funds say the mispricing largely has been caused by “tourist” dollars rushing in from passive funds and non-specialised money managers, such as hedge funds or high-yield funds, chasing higher returns.
“It’s frustrating for me as an investor,” said Josephine Shea, portfolio manager at Standish Mellon Asset Management Company LLC. “There seems to be quite a bit of indiscriminate buying without looking into underlying fundamentals.”
The difference between emerging market bonds yields and yields for US Treasuries has widened over the past couple months, most recently touching 339 basis points as the US dollar strengthened and local factors weighed on countries in Latin America and the Middle East.
However, that number is 35 basis points tighter than the 16-year historical average and comes after spreads compressed to their tightest in three years in mid-October. — Reuters