London - Investors are returning to the riskier, less developed bond markets of Africa and other frontier economies, burying memories of past setbacks and plunging in after global yields failed to rise as much as expected.
Ignoring attacks by Somali-linked Islamic militants in a Kenyan coastal town which killed at least 50 people, they flocked to the country's debut dollar bond this week,
The $2 billion issue - sub-Saharan Africa's largest dollar frontier market bond - was seven years in the making but investors said the timing was right for the junk-rated sovereign borrower.
Stuck for a place to find yield, they are targeting frontier markets - a tier below the larger, more established emerging economies - in Africa as well as Asia, eastern Europe and Latin America.
“There is so much risk appetite; people are being pushed into anything that has yields,” said Antoon de Klerk, fund manager at Investec Asset Management. “It seems that the market has quite a short-term memory.”
US Treasury yields have not risen as high as many predicted a year ago, when then-Federal Reserve chairman Ben Bernanke hinted the central bank would reduce its bond-buying.
This programme, designed to boost the US economy, had kept yields depressed and encouraged investors to move funds into emerging markets for better returns.
The prospect that the purchases would be wound down prompted an emerging market sell-off last year, but this has partly unravelled as investors now adapt to the reality of life without Fed support.
At the same time, central banks in Japan and the euro zone are making sure yields stay low in their bond markets to stimulate their own economies.
All this has increased the attraction of frontier markets.
The 10-year portion of Kenya's two-part bond yielded less than 7 percent, but this compared with 2.6 percent on US Treasuries, 1.35 percent on German Bunds and a measly 0.6 percent on Japanese government bonds.
Even the average yield for emerging market debt is little more than 5 percent.
SUDDENLY, LAST SUMMER
Fund managers say Kenya has a positive growth and monetary policy outlook, making it an attractive investment proposition, despite the attacks that are hitting tourism.
Militants killed at least eight more people in a second night of attacks on Kenya's coast, officials said on Tuesday.
“Security is a concern but it's not a showstopper,” said de Klerk.
Other upcoming frontier bonds include possible issues from Ecuador, El Salvador and Ethiopia.
But bets on high-yielding frontier debt haven't always paid off.
Shortly before Bernanke changed the investment landscape, Rwanda came to the market last April with a small debut 10-year dollar bond, also at a yield of less than 7 percent.
The bond's yield rocketed to 9 percent within weeks as Western investors took their money back home, where yields were rising and the outlook was safer.
Bonds from Ghana and Zambia also suffered in the months after their launch.
Ghana has a widening budget deficit and rising debt, while falling copper prices have hurt top copper producer Zambia.
Specialist fund managers say it is important that investors discriminate between country risks, rather than buying a bond for its yield, regardless of its domestic policies.
Nigeria, for example, has outperformed other African dollar debt, as investors focus on the recalculation of its Gross Domestic Product which made it Africa's largest economy.
Yet the renewed enthusiasm for all things high-yield means Zambia managed to issue a second dollar bond this year, admittedly with a fatter yield than before, and frontier bond yields have subsided from their highs.
“It's a pretty good time for the Kenyans to come to the market - six months ago they'd have been paying a lot more,” said Kevin Daly, emerging debt fund manager at Aberdeen Asset Management.
Kenya's $2 billion bond attracted more than $8 billion in orders, over four times the issue size. However, this was well below the bubble territory of previous years, such as the 15 times oversubscription of Zambia's debut $750 million bond in 2012.
But frontier debt market returns of 9 percent this year and spread levels at their tightest in a year suggest to some that there may not be too much more upside.
Local currency debt, in contrast, has been underperforming emerging and frontier dollar debt this year.
Salman Ahmed, global fixed income strategist at Lombard Odier, pointed to local debt yields in investment grade-rated India of 8.5 percent, comparing favourably with Kenya's dollar-based yields.
“Frontiers are facing ... much higher yields in emerging market local currency,” he said.
Such debt also caries a lower risk of default than the likes of Argentina.
President Cristina Fernandez has vowed to find a way to service Argentina's restructured debt despite suffering a major setback in a long legal battle against “holdout” investors.
For borrowers such as Ecuador - which selectively defaulted on its debt in 2008 but was on a roadshow for new debt last week - the issue is not so much about “can't pay” as about “won't pay”.
Ecuador's previous unwillingness to repay its debt even when it could may deter investors, however hungry they are for yield. Here their memories do seem long enough to remember the default.
“Ecuador has demonstrated a poor record in repaying debt,” said Colm McDonagh, head of emerging market fixed income at Insight Investment. “How do you price that risk?” - Reuters