BLBG: Emerging Market Debt Soars on Growth Forecasts: Credit Markets
By Kate Haywood, John Detrixhe and Caroline Hyde
April 8 (Bloomberg) -- Emerging market bonds, with returns four times those of U.S. corporate debt, are extending their lead on signs that developing nations are growing faster than the world’s biggest economies.
Debt issued by emerging market borrowers returned 11.3 percent this year through April 6, outpacing the 2.79 percent gains of U.S. company bonds, according to Bank of America Merrill Lynch index data. Petroleos de Venezuela SA, the state oil producer known as PDVSA, returned 6.64 percent this month, driving emerging-market debt’s 0.09 percent gain, compared with a 0.39 percent loss for U.S. corporate bonds.
The International Monetary Fund forecasts developing economies will expand 6 percent this year, almost three times more than advanced nations. While the European Union tries to contain Greece’s budget deficit, the U.S. government is issuing record amounts of debt to help recover from the worst financial crisis since the 1930s.
“The blowout of developed countries’ fiscal deficits has caused people to re-assess emerging markets as an asset class,” said Brett Diment, the head of emerging-market debt in London at Aberdeen Asset Management Plc. “The days when they were seen as a risky bet are gone.”
JPMorgan Chase & Co. boosted its forecast for money flowing into emerging market funds to $40 billion to $45 billion this year, from a range of $30 billion to $35 billion, analysts led by Joyce Chang in New York wrote in a report last month.
Emerging Attractions
Emerging markets are attracting investors seeking higher yields as developed nations take longer to recover, and central banks keep benchmark interest rates at record lows, said Werner Gey Van Pittius, emerging-markets money manager at Investec Asset Management in London.
Elsewhere in credit markets, the extra yield investors demand to own corporate bonds rather than government debt yesterday rose 1 basis point from the lowest since November 2007, to 147 basis points, Bank of America’s Global Broad Market Corporate Index shows. The average yield fell to 4.027 percent.
The 12-month global default rate for high-yield debt fell to 9.9 percent in the first quarter, from 13 percent at the end of 2009, according to Moody’s Investors Service.
Lorillard Inc., the third-largest U.S. tobacco company, sold $1 billion of debt. It sold $750 million of 10-year notes that yield 300 basis points more than similar-maturity Treasuries and $250 million of 30-year bonds paying a spread of 340 basis points, according to data compiled by Bloomberg.
Delinquencies on commercial mortgages bundled and sold as bonds may top 10 percent this year, Deutsche Bank AG said.
Global Default Rates
The 12-month global default rate will drop to 2.8 percent by yearend, then decline to 2.4 percent by April 2011, Moody’s said in a report yesterday. The U.S. rate is expected to end the year at 3.1 percent. Based on dollar volume, 11.3 percent of U.S. speculative-grade bonds were in default in the first quarter, down from 16.6 percent in the previous quarter, the New York- based ratings company said.
U.S. leveraged-loan defaults were 10.3 percent, down from 11.9 percent in the prior three months, according to Moody’s. High-yield debt is rated below Baa3 by Moody’s and lower than BBB- by Standard & Poor’s.
The delinquency rate for loans backing commercial mortgage- backed securities more than tripled to 6.74 percent in March from 1.91 percent a year earlier, Deutsche Bank analysts Richard Parkus and Harris Trifon wrote in a report. With delinquencies rising 0.75 percentage point last month, the rate shows little sign of slowing as loan servicers struggle with a growing pipeline of troubled debt, the New York-based analysts said.
Lorillard Offering
Lorillard’s debt was sold through the company’s Lorillard Tobacco Co. unit. The Greensboro, North Carolina-based maker of Newport cigarettes last sold debt on June 18, issuing $750 million of 8.125 percent, 10-year notes at par, or a spread of 428.9 basis points, Bloomberg data show.
FirstMac Ltd., an Australian non-bank lender, will seek to refinance A$340 million ($315 million) of mortgage-backed securities, Chief Financial Officer James Austin said in a telephone interview today. Brisbane-based FirstMac wants to replace debt sold in 2006.
Also in Australia, Westpac Banking Corp. is seeking to sell bonds due in April 2013, according to an e-mailed statement from the lender.
The Philippines’ Bureau of the Treasury plans to hold an April 20 auction for about $500 million worth of bonds targeted at overseas Filipino workers, Treasurer Roberto Tan said in an interview today.
Corporate Credit Risk
Credit-default swaps linked to Greek debt rose higher than those tied to Iceland for the first time, sending a benchmark indicator of U.S. corporate credit risk to its biggest jump in two weeks. Swaps tied to Greece rose to 415 basis points while those on Iceland traded at about 400 basis points, according to Markit data.
The Markit CDX North America Investment Grade Index Series 14 rose 3.4 basis points to a mid-price of 87.5 basis points as of 4:19 p.m. in New York yesterday, according to Markit Group Ltd. In London, the Markit iTraxx Europe Index of credit-default swaps on 125 investment-grade companies climbed 3.3 basis points to a mid-price of 80 basis points, Markit prices show.
The indexes typically increase as investor confidence deteriorates and fall as it improves.
Bond risk rose today in Asia. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan increased 3 basis points to 97 basis points as of 8:15 a.m. in Singapore, Royal Bank of Scotland Group Plc prices show. The Markit iTraxx Australia index rose 3 basis points to 85.5 basis points as of 9:02 a.m. in Sydney, according to Westpac Banking Corp.
Thailand, Indonesia
In Thailand, sovereign credit swaps rose to a two-week high after Bangkok was put in a state of emergency as Prime Minister Abhisit Vejjajiva strove to prevent weeks of anti-government protests turning violent as demonstrators stormed parliament.
Credit swaps pay the difference between the value of defaulted debt and its face value should the borrower fail to meet its obligations. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Indonesia’s stocks are in a bubble and officials are prepared to put controls on capital inflows if needed to maintain stability, the head of the central bank’s economic research and monetary policy division, Perry Warjiyo, said in an interview in Jakarta.
Greek Woe
Greece may default on its debt as soon as this year without “extraordinary” financial assistance from the EU and IMF, said Stephen Jen, managing director at BlueGold Capital Management LLP in London.
The nation is trying to cut its budget deficit to 8.7 percent of gross domestic product this year. Finance Minister George Papaconstantinou yesterday said the 2009 deficit would be revised to at least 12.9 percent. The government is looking to raise about 11.6 billion euros ($15.5 billion) by the end of May, part of some 32 billion euros it needs this year.
Iceland required a $4.6 billion bailout led by the IMF after its three biggest banks collapsed in October 2008, leaving creditors wondering how they would recoup about $80 billion in debt.
Emerging-market bonds are rallying as their economies accelerate after growing 2.1 percent in 2009. Advanced nations will rebound to 2.1 percent growth after contracting 3.2 percent last year, according to IMF forecasts.
Economic Driver
“Most investors now share the view that emerging markets will be the driver of global growth over the medium term,” said Nick Darrant, who runs emerging market syndicate at Credit Agricole CIB in London. “The concept of flight to quality has been fundamentally undermined by the enduring strength of emerging markets. We are witnessing a paradigm shift.”
PDVSA, based in Caracas, led Bank of America Merrill Lynch’s emerging-market index of top 50 issuers, index data show. The company’s 5.5 percent bonds due in 2037 were priced at 51 cents on the dollar to yield 697 basis points more than benchmark rates, index data show.
“Investors will continue to search the globe for attractive fixed income assets” as the economic outlook in most developed countries remains “subdued,” Mark Kiesel, global head of corporate bond portfolio management at Pacific Investment Management Co. wrote in a report posted March 24 on the Newport Beach, California-based company’s Web site. “High- quality credit assets are likely to outperform lower-quality alternatives, which will become increasingly vulnerable to subpar economic growth in developed economies.”
The challenges facing Greece are similar to those that confronted Argentina, which defaulted on $95 billion of debt in 2001, Jen said in an interview. Greece’s austerity measures to narrow the budget deficit may drive the nation into a recession, he said.
“A default may be ultimately unavoidable,” Jen said.
Facing ‘Headwinds’
In the U.S., President Barack Obama has increased U.S. marketable debt to an unprecedented $7.41 trillion to fund a budget deficit the government predicts will swell to a record $1.6 trillion in the fiscal year ending Sept. 30.
Developed economies face “headwinds” stemming from a collapsed housing bubble, substantial household debt and sovereign deficits and budgetary concerns that are “much more severe and more serious than in most emerging markets,” said Torsten Slok, senior economist at Deutsche Bank in New York.
Emerging market corporate bond defaults may fall “sharply” to 1.8 percent this year, according to the JPMorgan analysts.
“Emerging market countries are now on a much stronger footing relative to developed countries and we are very optimistic on returns,” said Investec’s Van Pittius. “The risk of a currency crisis and sovereign default in most emerging markets is pretty low at the moment.”
To contact the reporters on this story: Kate Haywood in London at khaywood@bloomberg.net; John Detrixhe in New York at jdetrixhe1@bloomberg.net; Caroline Hyde at chyde3@bloomberg.net
