Mongolian Dollar Bonds Drop Most in Two Years as Copper Slumps

Mongolia’s dollar bonds are sliding at the fastest pace in almost two years as a slump in commodity prices dims prospects for the mineral-rich nation.

Sovereign notes due December 2022 dropped 5.1 percent in July, the biggest decline since August 2013, and have fallen on all but one day in the past four weeks, according to data compiled by Bloomberg. The yield has jumped 118 basis points since the end of June to a three-month high of 7.95 percent as of 2:47 p.m. in Ulaanbaatar.

“The bonds’ poor performance has been more a reflection of commodity-price softness than anything Mongolia specific,” said Matt Hildebrandt, a Boston-based sovereign credit analyst at Eaton Vance Corp., which manages $307 billion of assets. “The bonds are already starting to look attractive.”

The rising yields could increase borrowing costs for Prime Minister Chimed Saikhanbileg’s government, which is planning a $1 billion dollar debt sale this year before elections in 2016. Copper, the nation’s No. 1 export earner, is on the cusp of entering a bear market and the economy expanded at the slowest pace since 2009 in the first quarter.

Copper futures sank to the lowest level since July 2009 on Monday and traded at $5,194 a metric ton in London on Wednesday. A close at that level would be 20 percent less than the high of $6,481 on May 5, meeting the common definition of a bear market. Mongolia shipped $1.15 billion of copper in the first half, while coal was the second-largest export earner at $310 million, official data show.

Mine Expansion

Mongolia’s economy expanded 4.4 percent from a year earlier in the first quarter, slowing from 7.8 percent last year and record growth of 17.3 percent in 2011. The tugrik has weakened 5.8 percent against the dollar over the past year.

“Emerging-market currencies and debt are under a great deal of pressure at the moment,” said Nick Cousyn, chief operating officer in Ulaanbaatar at BDSec, the country’s largest brokerage. “From a long-term perspective, yields on Mongolian sovereign debt are relatively attractive.”

The dollar bonds due 2022 surged 8.2 percent in the second quarter as the government and Rio Tinto Group settled a two-year dispute over the funding of the Oyu Tolgoi copper mine, the nation’s biggest producer of the metal.

Economic growth will start to pick up next year due to election spending and a planned expansion of the Oyu Tolgoi mine, BDSec’s Cousyn said. Mongolia’s risk premium will narrow, he said.

The vote next year could cause more short-term volatility, said Eaton Vance’s Hildebrandt. But as long as the central bank continues to run a prudent macro-economic policy and phase II of the Oyu Tolgoi project moves forward, the medium-term outlook looks constructive, he said.

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