By Lilian Karunungan, David Yong and Veronica Espinosa March 31 (Bloomberg) -- Emerging-market companies and governments are borrowing at a record pace to take advantage of all-time low yields as HSBC Global Asset Management and Loomis Sayles & Co. say costs have further to fall. Developing-nation issuers sold $157 billion of bonds in the first quarter, the busiest start to a year since Bloomberg began compiling data in 1999, as the yield on the benchmark JPMorgan EMBI Global Diversified Index fell as low as 6.22 percent on March 17. Gerardo Rodriguez, Mexico’s head of public debt, said he saw a “window of opportunity” to sell $1 billion of bonds March 4, while Poland’s Dominik Radziwill cited “good market conditions” for three international sales in as many months. HSBC Global, Jyske Bank A/S and Loomis Sayles, which manage $580 billion, say the 13-month rally in emerging-market bonds will continue as faster economic growth and lower indebtedness lure investors while slower recoveries in advanced nations spur central banks to keep benchmark interest rates at record lows. “There is still value in emerging-market credit,” said Peter Marber, the New York-based head of developing-nation debt and currencies at HSBC Global, which oversees $427 billion worldwide. “Fundamentals are still strong.” Tightening Spread The yield on the EMBI Global Diversified Index dropped 33 basis points this year to 6.29 percent as of March 30, or 253 basis points higher than U.S. Treasuries of similar maturity. Patrick David Bengzon, who helps manage $11.8 billion at Jyske Bank, expects the so-called spread to decline to 200 basis points this year. A basis point is 0.01 percentage point. Developing economies will expand 6 percent this year after growing 2.1 percent in 2009, while advanced nations will rebound to 2.1 percent growth after contracting 3.2 percent in 2009, according to International Monetary Fund forecasts. The debt of emerging-nation governments will hold around 2007 levels this year at 39.6 percent of gross domestic product, while surging in advanced countries to 106.7 percent from 78.2 percent, estimates from the Washington-based IMF show. Investors scaled back expectations of an increase in U.S. and euro-area benchmark interest rates after European Central Bank President Jean-Claude Trichet said March 22 the region’s interest rate is “appropriate” at a record low 1 percent and Federal Reserve Chairman Ben S. Bernanke told lawmakers three days later the U.S. economy still needs low borrowing costs. Lower Deficits “We are still buying” developing-nation bonds, said Paul McNamara, who oversees $3 billion at Augustus in London, a unit of Zurich-based money manager GAM Holding Ltd. “The debt burdens and the deficits are much lower in emerging markets than they are in the developed world. We don’t see a high chance of default in most emerging-market sovereigns.” Mexico’s sale of $1 billion in 10-year international bonds priced at a record-low yield of 5 percent was 2.5 times oversubscribed. Poland’s latest international bond sale on March 22 raised 1.25 billion euros ($1.69 billion) and was priced to yield 3.852 percent. Further declines in borrowing costs are likely to be “limited,” according to Cornel Bruhin, who oversees $280 million as an emerging-markets fund manager at Clariden Leu AG in Zurich. “Investors need to be more selective going forth in their investment decisions within emerging markets,” said Bruhin, who reduced holdings of some of the most widely held government bonds including those sold by Argentina, Brazil, Mexico, Turkey, Indonesia and Sri Lanka. Higher Inflows The 253 basis-point yield spread over Treasuries on the EMBI Global Diversified Index compares with an all-time low of 162 on June 1, 2007, and an average of 515 since Bloomberg began tracking the data in 1997. Inflows into developing-nation bond funds will drive the yield gap with Treasuries lower, said Jyske Bank’s Bengzon and Rahmat Waluyanto, director general of Indonesia’s debt management office. Developing-nation bond funds attracted $1.05 billion in the week to March 24, the second-highest on record. Inflows this year of $7 billion pushed assets under management at the funds to a record $74.7 billion, said Cambridge, Massachusetts-based research company EPFR Global. ‘Sweet Spot’ “Indonesia and some other emerging-market economies are in a sweet spot right now that would provide the best opportunity for emerging markets to sell debt,” Waluyanto said. “With the persistent influx of offshore funds, the yield may decline as far as Indonesian bonds are concerned.” Indonesia sold $2 billion of 10-year bonds to yield 6 percent in January. A rally in the securities has since pushed the yield down to 5.33 percent, according to prices compiled by Bloomberg. The country plans to sell as much as $1.1 billion of yen-denominated bonds in April and $750 million of global Islamic bonds in the third quarter. Yields on Russia’s dollar bonds due 2030 have dropped to 5.03 percent from 5.60 percent in December as the world’s largest energy exporter prepares a sale next month of its first foreign-currency debt since the 1998 financial crisis. Deputy Finance Minister Dmitry Pankin said on Feb. 16 the nation “must seize the moment” to sell bonds before yields start to rise in the second half. The government and companies in Russia may borrow about $27 billion this year, the most among developing nations, according to ING Groep NV estimates. U.S., U.K. Risk While Indonesia’s rating was raised to the highest level in 12 years by Standard & Poor’s this month, Moody’s Investors Service said the U.S. and U.K. have moved “substantially” closer to losing their top AAA credit ratings as increased borrowing to finance rescue packages for banks causes debt- servicing costs to rise. “Emerging markets are beautiful these days and loved by everyone because they didn’t get in so much trouble,” said Edgardo Sternberg, an emerging-market strategist at Loomis Sayles in Boston who helps oversee $142 billion. “Spread wise they can go tighter.” To contact the reporters on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net; David Yong in Singapore at dyong@bloomberg.net; Veronica Navarro Espinosa in New York at vespinosa@bloomberg.net

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