Emerging bonds fall as issuers delay debt sales

Moscow: Russia may have been the last developing nation to tap record-low bond yields as the spreading Greek financial crisis makes emerging-market bonds unprofitable for the first time since 2008.

The EMBI+ Index of debt from Brazil to the Philippines fell 0.7 per cent since March, heading for the first quarterly decline since the period ended December 2008, according to JPMorgan Chase & Co. Russia's five-year eurobonds tumbled 3 per cent from their issue price two weeks ago and governments from the Czech Republic to Albania and Indonesia delayed debt sales.

Record amount

While investors pour record amounts into emerging-market bond funds, yields are rising as the European Union's bailout of Greece spurs concern the global recovery will slow and cut demand for riskier assets. Argentina may pay 11 per cent yields on dollar bonds this year, higher than its 10 per cent target, according to Aberdeen Asset Management Plc. Ukraine may face costs as high as 7.75 per cent on five-year debt compared with the 7.5 per cent yields on existing bonds, Union Investment said.

Investors are ending the "denial phase in debt markets," said Jeremy Brewin, head of developing-nation bonds at Aviva Investors in London, which oversees about $377 billion. Predictions that "emerging markets have evolved a new resilience capable of avoiding these sell-offs are being challenged" and "may lead to a major reversal from the confident highs of two weeks ago," Brewin said.

The retreat is raising interest costs as governments and companies in emerging markets plan to borrow at least $39 billion on top of the $234 billion sold so far in 2010, according to data compiled by Bloomberg. More than $753 billion of developing-country debt matures in the second, third and fourth quarters of 2010, the data show.

The average yield on emerging-market bonds, which moves inversely to prices, rose to 6.51 per cent yesterday from a record low of 6.18 per cent on April 15, when China reported the fastest economic growth in almost three years. Developing-nation debt fell yesterday, losing 0.2 per cent in London, according to the EMBI+ Index. The extra yield investors demand to own the securities over Treasuries dropped three basis points to 2.92 percentage points as US government bond yields rose.

The gap may widen to 3.5 percentage points before money managers increase holdings, according to Nigel Rendell, senior emerging markets strategist at RBC Capital Markets in London.

Growing prospects that Greece may default raised concern that Spain and Portugal will struggle to pay debt as well. Standard & Poor's lowered its ranking for Spanish debt one step to AA on April 28. S&P also lowered Greece three levels last week to the junk grade of BB+, and Portugal by two steps to A-.

"It's not the best time for emerging-market countries to sell bonds," said Regis Chatellier, a strategist for developing-nation debt at Morgan Stanley in London. "The Greek crisis is a big factor, and it's going to be much more volatile in emerging markets than it was over the past few months."