Pakistan Re-Enters Global Bond Markets
*Nation Sells $2 Billion of Debt, Almost Two-Thirds to U.S.-Based Money Managers
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By ANJANI TRIVEDI
April 9, 2014 7:19 a.m. ET
Pakistan returned to the international bond markets Wednesday after a seven-year hiatus, joining a number of other countries around the world raising cash as yield-hungry investors look to put money to work.
Pakistan sold $2 billion of debt, with almost two-thirds going to U.S.-based money managers, two days after Sri Lanka sold a bond for a second time this year. Bankers say Papua New Guinea, Bangladesh and Bhutan are also expected to come to the market this year, hoping to lock in low yields.
The demand reflects both improving economies in these countries and investors’ appetite to venture further afield for high returns. The appeal of emerging-market debt has risen as central banks in U.S., Europe and Japan pledge to maintain stimulus measures to keep growth humming, a move that pushes up asset prices across the globe.
“There’s been a reversal in the sentiment towards emerging markets over the last two weeks. Everyone loved to hate them, and now, all of sudden everyone is increasing their positions,” said Rajeev DeMello, head of Asia fixed income at SchrodersSDR.LN +0.69% Investment Management in Singapore, which has $435.4 billion of assets under management.
Mr. DeMello’s fund holds Pakistani bonds and said his funds are interested in buying more, and Sri Lankan bonds.
In March emerging markets saw $39 billion in portfolio inflows from global investors—$24 billion of which was into bond markets—up from $25 billion in February and $5 billion in January, the Institute of International Finance estimated.
Pakistan racked up orders worth $7 billion while Sri Lanka drew over eight times the $500 million on offer with orders of $4.3 billion, with a significant uptick of Asian investors’ participation compared with its $1 billion January issuance. The finance ministries of Papua New Guinea, Bangladesh and Bhutan weren’t immediately available for comment.
Devesh Ashra, head of Asia debt syndicate at Bank of America Merrill Lynch, said the most important reason these countries are issuing bonds is the expectation that global interest rates are going to rise. The Federal Reserve has started slowing the pace of economic stimulus, meaning it is likely that yields are set to rise as the U.S. economy improves.
“U.S. investors are looking for incremental yield and issuers are ready to lock in rates knowing that we are going to be in a higher-rate environment in one year’s time,” he said.
The debt is sold in dollars, another lure for investors given strong prospects for the greenback in the long run on signs of a slow but renewed recovery.
But even outside the U.S. dollar, there is demand for emerging markets that had been shunned last year. Turkey said Tuesday it would issue a euro-denominated bond and Greece says it will return to the market with an approximately €2 billion ($2.75 billion) debt sale, for the first time after being bailed out.
“Investors are losing patience with the very low yields” in U.S. Treasurys, said Schroders’ Mr. DeMello. Investors are also beginning to realize that they “will be stuck with very low yields for a long time,” so they are paying attention to these higher-yielding markets once again, he said.
Still, some investors are steering clear of these bonds, and say that these countries haven’t done enough to improve their finances and economies yet.
Low returns in the U.S. mean there is “a lot of money being sloshed around,” said Robert Abad, an emerging-markets portfolio manager at Legg Mason’s Western Asset Management in Pasadena, Calif. ,with $451.6 billion under management. While this money will find a home, he said, “it’s all opportunistic. It’s not clear how these proceeds are going to be used.”
Mr. Abad isn’t buying any of these new bonds, while he does hold higher-rated bonds of Indonesia, Malaysia and Thailand.
While many other long-term investors remain convinced there is high-growth potential of these emerging markets, several are treading carefully and in some places demanding extra compensation for holding risky assets.
While investors welcomed junk-rated Pakistan’s 10-year bonds, the country had to pay investors a hefty premium for the deal. The yield was at 8.250%, compared with 6.875% it paid to issue a similar-duration bond in 2007 and that is currently trading at 6.338%.
It was a similar story on Tuesday with Zambia, which issued a $1 billion bond, its second-ever dollar bond. The African nation had to pay higher borrowing costs for the deal.
Anjani Trivedi at [EMAIL=“[email protected]”][email protected]
