Hunt for yield drives record sales of long-dated EM debt

[dropcap]E[/dropcap]merging market countries, banks and companies are selling long-dated debt in record volumes as investors’ search for yield pushes them to expand their appetite for risk.

With markets set to remain open for business for another couple of weeks before winding down to year-end, syndicated sales of paper with maturities of 10 years and more has hit a record high in emerging economies, topping US$500bn for the first time according to figures from Dealogic, a data provider.

Around a third of the total finance raised came from sovereigns and related entities, while 37 per cent came from EM corporates and a quarter from financial institutions, according to Dealogic.

Ultra-low interest rates in developed economies have channelled a wave of money towards higher-yielding assets, pushing up prices in EMs.

Angus Bell, a senior portfolio manager at Goldman Sachs Asset Management, said the search for yield “has contributed to demand for higher duration and lower credit quality, or in this case a combination of both”.

However, he argued, EM’s economic fundamentals were “very well supported”, benefitting from a “tailwind” from the current wave of global growth.

Longer-dated debt heightens the level of risk investors take on when issued at rates that are low by historic standards because of its long duration — the amount of time it takes for a bond’s coupon payments to recompense an investor for the initial purchase price.

But Will Weaver, Emea head of debt capital markets at Citi, argued relatively high yields available for long-dated EM debt — in comparison to bonds issued in developed economies — mitigate duration risk. For example, investors in the century bond that Argentina raised this summer will recoup their initial investment in around 12 years, given its 7.9 per cent yield.

Other notable long-dated issuance this year included Austria’s €3.5bn century bond, and 30-year debt sales by Russia, Egypt, Saudi Arabia, Abu Dhabi and Kuwait.

The recent wobble in EM assets has aided investor appetite, he added, as pricing cooled slightly — some buyers “were a little relieved that the EM rally took a breather”. Nigeria brought its first 30-year paper to market just after that and saw strong demand, Mr Weaver noted.

Local EM institutions such as pension funds and insurers comprise a growing share of investor demand, Mr Bell said, offering an additional support for asset pricing, in particular “for longer duration issues to match liabilities”.

The rise in long-dated debt could push the total overall amount raised by EM bond issuers this year to top last year’s record. EM issuers have raised US$1.54tn in debt — only slightly lower than the 2016 total of US$1.67tn.

Mr Weaver said the rising tide of EM bond issuance was partly being driven by an increasing volume of existing debt maturing, and noted that the trend was likely to continue as “next year is also set to be a big year for redemptions”.

The figures include both foreign and local currency-denominated issuance, but do not capture sales of debt by auction.