Emerging-Markets Bond Rally Meets the Jack Pot

(Bloomberg Gadfly) -- From Argentina to Ivory Coast, developing countries are emerging as the biggest winners of 2017.

You might imagine Argentina, which has defaulted on its sovereign debt eight times since independence 200 years ago, would be a hard sell. But in June, the Latin American nation issued a 100-year bond, drawing $9.75 billion orders for the $2.75 billion debt. The same month, Ivory Coast, which survived an army mutiny weeks earlier, sold a 16-year, $1.25 billion bond amid robust demand.

Never mind reasonable questions about whether those governments will honor their promises in decades to come -- both bonds are finishing 2017 on a high note.

Emerging markets have sold a ton of long-dated dollar bonds this year, taking advantage of a weak greenback and the flattening yield curve. They raised at least $125 billion, more than the two previous years combined.

For now, the bullish sentiment is likely to continue. After all, looking at the dot plot, even the Fed is seeing the benchmark U.S. interest rate at no more than 2.75 percent in the long term, so the current 10-year yield of 2.42 percent isn't far off course. And unless that central bank embarks on a more rapid pace of rate increases, the outlook for the dollar is bearish, strategists say. This helps explain why emerging markets' outstanding bonds yield only 4.5 percent, the lowest since the 2013 taper tantrum.

But here's a problem: As every asset class starts to look pricey, investors may re-evaluate their portfolios and seek the temporary safety of money-market accounts instead. One-year Libor is now 2.1 percent, only 32 basis points lower than the 10-year Treasury.

An interesting trend in 2017 was heavy buying by Chinese investors in the dollar bond market, so much so that SoftBank Group Corp., a high-yield issuer, didn't even bother marketing a new dollar bond in the U.S. and sold in Singapore instead. But it's reasonable to ask if Chinese investors will sustain their appetite for emerging markets when rates at home are rising. 

On Thursday, Alibaba Group Holding Ltd. affiliate Ant Financial, which operates the world's largest money-market fund, Yu'e Bao, was offering 4.18 percent annualized returns for a seven-day deposit -- the highest since July. Keep in mind Ivory Coast's new 16-year dollar bond is yielding only 5.94 percent.

Annualized rate on seven-day Yu'e Bao deposit

4.18%

The offer was so attractive, I was tempted to hit the "transfer money immediately" button on the AliPay app. But I wrote this instead.

Warren Buffett suggests that if you're not comfortable with the idea of owning a stock for 10 years, you shouldn't consider owning it for 10 minutes. The same might be said of long-term bonds from Argentina and Ivory Coast, especially at current yields, and compared with Jack Ma's 1.5 trillion yuan ($230 billion) money market fund. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Gadfly columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

To contact the author of this story: Shuli Ren in Hong Kong at sren38@bloomberg.net.

To contact the editor responsible for this story: Paul Sillitoe at psillitoe@bloomberg.net.

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