Debut Bonds Turn Market Nightmare as Honduras to Rwanda Sink
Debut emerging market borrowers from Honduras to Rwanda, welcomed with record low interest rates this year, have lost as much as 14 percent for bond investors as U.S. policy makers consider paring economic stimulus measures.
Developing nations sold $35.5 billion of dollar debt in the first half with yields as little as 2.72 percent while investors searched for higher returns as rates on everything from Treasuries to corporate junk bonds reached record lows. Emerging sovereign bonds fell the most last quarter since the global financial crisis in 2008 as Federal Reserve Chairman Ben S. Bernanke signaled the central bank may reduce its $85 billion a month of bond purchases this year.
Honduras’s $500 million of 7.5 percent securities due 2024 lost 14.46 percent last quarter, the biggest drop, and Rwanda’s notes due 2023 declined 9.88 percent since their April sale, data compiled by Bloomberg show. Rising yields may make it costlier for countries including Kenya and Uganda, which are now planning sales.
“For the likes of Rwanda and others, where we’ve seen ridiculously low bond yields for new offers, investment managers will definitely be thinking twice before trying to buy any of that paper going forward,” Craig Veysey, the London-based head of fixed income at Sanlam Private Investments Ltd., which manages $10.3 billion in assets, said in a June 26 interview. He said he steered clear of the Rwanda bonds.
Yields on developing nations’ debt climbed by an average 0.95 percentage point in the second quarter to 5.8 percent, the most since the fourth quarter of 2008, according to JPMorgan Chase & Co. indexes. Yields on Honduras’s bonds have risen 2.14 percentage points to 9.64 percent on July 1, and fell four basis points to 9.6 percent today. Rwanda’s yield jumped to 8.48 percent from an initial 6.875 percent, and slipped 17 basis points to 8.31 percent as of 3:07 p.m. in London.
Money managers ordered eight times the $400 million of securities offered by Rwanda, which is rated five levels below investment grade of B by Standard & Poor’s, to pay for a convention center, development of the national carrier and a hydropower plant.
“We came to the market knowing our bond would be around 7 percent,” John Rwangombwa, the governor of the National Bank of Rwanda, said June 27 at a conference in London. “It’s gone up to 8 percent, so we would not be thinking of coming to the market today.”
The yield on two-year U.S. Treasuries touched 0.19 percent in May and that for notes included in the Bank of America Merrill Lynch U.S. High Yield Index reached 5.98 percent, both record lows. They have since risen to 0.36 percent and 6.97 percent, respectively.
Less than 20 years after the genocide that killed about 800,000, Rwandan President Paul Kagame is borrowing to boost transport links and promote regional trade with the aim of lifting the land-locked tea- and coffee-growing nation into a middle-income economy by 2020.
Rwanda’s total debt stood at 24 percent of gross domestic product at the end of last year. The ratio was 43 percent in South Africa, the largest economy in Africa, data compiled by Bloomberg show. Rwanda ranks eighth out of 185 countries for the ease of starting a company and 52nd for doing business, the highest in sub-Saharan Africa after South Africa.
MFS is keeping its Rwanda bond holdings because of market-friendly government policies and lower public debt than peers, Matthew Ryan, who helps oversee $18 billion of emerging-market debt as a fund manager at MFS Investment Management in Boston, said by e-mail.
“This is in contrast to Honduras, where we see slippages increasing and the upcoming elections injecting even more uncertainty to an already tenuous story,” he said.
S&P cut its outlook for Honduras’s long-term ratings of B+, which is one level above Rwanda, to negative from stable on Feb. 27, citing the risk fiscal policy will be eased in an election year.
“The volatility of the international market has caused the yields to rise,” Sammy Castro, Director of Public Credit for the Honduras Finance Secretary, said in a July 1 telephone interview. “The current yield of 9.6 percent is extremely high and expensive and we will continue to monitor the international market before making any decision about going back.”
Debt levels in Honduras increased to 35 percent of GDP last year, from 25 percent in 2009, according to a bond prospectus issued by the Central American country. Presidential elections are scheduled for Nov. 24, with Xiomara Castro, the wife of former president Manuel Zelaya, leading the race with 28 percent support, according to a CID-Gallup poll, which surveyed 1,233 potential voters from May 2 to May 8 and has a margin of error of 5 percentage points.
Kenya is seeking a lead manager to sell $1 billion of notes to fund infrastructure projects, the Treasury said in a statement published in the Nairobi-based Standard newspaper June 25. Uganda is also looking at a “big” international bond, Finance Minister Maria Kiwanuka said during a June 27 interview in London. Nigeria expects to raise $1 billion today in a sale of five- and 10-year bonds as it seeks funds to finance power projects, according to a person with knowledge of the plans.
“The appetite for frontier markets has now taken a serious hit,” Benoit Anne, the head of emerging-markets strategy at Societe Generale SA in London, said in a June 26 e-mail, referring to a term for less advanced developing economies. “The backdrop for new entrants into international capital markets has deteriorated.”
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