Economists around the world are fretting about rising interest rates, according to a Financial Times poll. If emerging market bond investors are concerned, however, they are keeping it well hidden. While developed sovereign yields have shifted higher this year, those on emerging market debt have not followed suit. Spreads have held firm. That suggests either complacency or persistent optimism for the sovereign and corporate debt issued by developing nations. Given perennial investor hunger for yields, the latter looks more likely.
One sign of the persistent demand for EM debt can be seen in the enormous $10bn offering by Qatar Petroleum this week, its first in 15 years. This will be the third-largest EM bond deal in the past five years, according to data from Dealogic. Qatar Petroleum, a large producer of liquefied natural gas, has the backing of rising hydrocarbon prices. That enhances its credit rating, currently at double A minus according to S&P.
Healthy EM yields everywhere keep buyers returning for more. Witness the steadily growing fund flows into this sector. Year to date inflows have been strong, the most on a comparable basis since 2017, says Morgan Stanley. Within global credit, money moving into EM hard currency bond funds trails only that of US investment-grade funds in the past couple of years. Local currency debt flows have rebounded too.
That demand explains why EM yield spreads remain relatively low. The spreads of both sovereign and corporate issuers have fallen to three-year lows. But emerging market debt has become a very broad church in the past decade. Some regions have suffered more from the spread of Covid-19. Concerns about Latin America are offset by the progress made against the virus in Asia. Until very recently, Sub-Saharan Africa has had fewer pandemic cases. Angola’s economic and political reforms make its 2025 9.5 per cent coupon sovereign bonds an attractive proposition, think EM investors Gemcorp.
Bond investors continue to want more yield. Any concerns about rising interest rates in developed countries will not tip them out of higher coupon EM bonds just yet.
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