Photographer: SeongJoon Cho/Bloomberg

Mongolia, Anyone? Junkiest Sovereign Debt Pays Less Than 6%

Updated on
  • Yields of CCC-rated countries drop amid hunt for returns
  • Investors pushed down risk scale to Mongolia, Ukraine, Belarus

As recently as 1999, investors seeking a 6 percent yield on a government bond could have bought 10-year U.S. Treasuries. These days they can’t even get that from Mongolia.

Central-bank bond buying has compressed yields in developed markets to unprecedented levels, pushing investors further down the risk spectrum in a hunt for higher returns. Yields on Mongolian dollar bonds maturing in 2021 fell below 6 percent for the first time on record late last month after dropping 3.5 percentage points this year.

Yields on 2019-maturity Ukrainian debt and seven-year Belarussian bonds issued in June have also moved below 6 percent in the past two months. All three former Communist nations have a Bloomberg Composite rating of CCC+, or seven levels below investment grade. In a Bloomberg index of emerging-market sovereign dollar debt, only El Salvador, Barbados and Venezuela are rated lower.

Analysts at Morgan Stanley recommended buying Ukrainian bonds in a research note published Wednesday, saying the debt still offers value. Emerging-market sovereign credit spreads are likely to tighten even further over the coming months as improving fundamentals outweigh high valuations, the analysts said.

“While we are not arguing that EM sovereign is cheap on an outright basis, given the rally in the past 18 months, we do view EM sovereign credit as the most attractive global credit asset class,” said the analysts including Gordian Kemen.

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