Sweet Spot in Emerging Debt Has Goldman Warily Seeking Yield

(Bloomberg) -- The hunt for yield is back for investors in emerging markets, albeit with a cautious twist.

Quasi-sovereign bonds, notes from companies at least partially owned by a government, are in vogue for firms including Goldman Sachs Group Inc. and Barings LLC that are seeking strong returns amid lots of economic uncertainty.

This debt, which includes some credit risk, pays more than sovereign notes and is often considered safer than pure corporate bonds. A Bloomberg Barclays gauge of emerging-market company and quasi-sovereign dollar debt returned 5.4% since the virus shuttered cities in early March 2020, compared with a 2.9% return from a comparable index tracking strictly government notes.

Investors are weighing concern about the delta variant’s impact on the world’s nascent growth recovery. Those worries have driven down yields, igniting interest in assets that can offer compelling returns alongside risk mitigation.

Quasis are often a high-beta version of the sovereign,” said Sara Grut, a senior strategist at Goldman Sachs in London. “If you like sovereigns for the carry, it makes sense to look at some of the quasis.”

While the firm’s analysis shows the median quasi-sovereign bond spread with a yield pickup of 80 basis points, energy-linked notes from state-owned enterprises such as Kazakhstan’s KazMunayGas and Azerbaijan’s Southern Gas Corridor could offer even more.

Mexico’s state-owned oil company Petroleos Mexicanos also looks cheap and benefits from its backing by the administration, said Omotunde Lawal, London-based head of emerging-market corporate debt at Barings. Dollar bonds due in 2050 from Pemex, as the driller is known, yield about 8.1% compared with the 4.1% yield of Mexican government bonds of the same maturity, according to data compiled by Bloomberg.

“You get even more comfort from the fact that it’s government-owned and very strategic to the Mexican government,” Lawal said. “It’s really about looking at it as a spread over the sovereign.”

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Political risk is heating up from Latin America -- where Peru elected a leftist leader -- to China, where recent crackdowns have hit borrowers including state-owned enterprises as policy makers double down on efforts to instill financial discipline and curb moral hazard in credit markets.

Scrutiny of state-linked debt has intensified this year, with investors mulling a potential restructuring of bad-bank China Huarong Asset Management Co. That’s adding to concerns after a pick-up in defaults among state-owned enterprises late last year and as China’s sovereign bond rally was interrupted by the biggest spike in benchmark yields in a year.

Central Bank Watch

• Mexico’s central bank may raise interest rates on Thursday to contain inflation, even as the economy struggles to regain its footing after the biggest economic contraction in nearly a century
• Turkey’s monetary authority is expected to leave borrowing costs unchanged the same day, despite pressure from President Recep Tayyip Erdogan to cut rates
  • CBRT has pledged to maintain the policy rate, currently at 19%, above both realized and expected inflation, and a price spike in July lifted inflation to 18.95%
• The Philippine central bank will probably hold its benchmark rate at a record-low 2% also on Thursday
  • The peso neared its lowest since May 2020 after the central bank said a reserve-ratio cut is on the table
  • Governor Benjamin Diokno on Monday said reduction in the reserve ratio isn’t part of the agenda for this week’s Monetary Board meeting
  • “Reports of a possible RRR cut triggered short covering in USD/PHP,” said Eugenia Victorino, head of Asia strategy at Skandinaviska Enskilda Banken AB in Singapore. “But considering the weak domestic demand, there is no real demand for the pair at this point”
  • The nation will report gross domestic product data on Tuesday. The economy probably expanded 12.6% from a year ago in the second quarter, according to Bloomberg Economics. The two-week strict lockdown in Manila until Aug. 20 is weighing on the growth outlook
• Peru’s central bank will raise rates by 25 basis points to 0.5% in response to rising inflation and inflation expectations, according to Bloomberg Economics
• Brazil’s monetary authority will release minutes on Tuesday from its latest meeting, in which policy makers lifted the Selic rate by a percentage point
• Romania’s central bank chief, who has struck a more hawkish tone of late, will present an updated inflation forecast

What Else to Monitor

• China’s factory-gate inflation surged again to 9% in July as commodity prices climbed, while core consumer prices -- which strip out volatile food and fuel costs -- rose the most in 18 months, a report showed Monday
• Mexico’s annual inflation remained far above the central bank’s target ceiling in July, keeping pressure on board members to continue raising interest rates at Thursday’s monetary policy decision
  • The nation will also release industrial production figures on Wednesday
• Traders will also watch Brazil’s inflation figures on Tuesday, retail sales data Wednesday and June economic activity on Friday for signs of growth in Latin America’s biggest economy
• India will release inflation data on Thursday
• In Colombia, traders will watch June retail sales on Thursday for clues on how shoppers are behaving amid lingering pandemic risk
• A flash reading of Russia’s GDP data on Friday will probably show a rebound in the second quarter, buoyed by stimulus and energy prices
• The same day, Poland is forecast to report a rebound in its GDP
• Malaysia’s GDP data release, also on Friday, will show the economy expanded by 14.5% from a year ago, supported by a favorable base effect after last year’s contraction due to the pandemic, according to Bloomberg Economics

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