Corporate Bonds Are All the Rage in Emerging Markets

Corporate Bonds Surge for the 12th Successive Month in Emerging Markets

Source: Yahoo Finance

Demand for corporate bonds is deepening in emerging markets as political strife from Hong Kong to Lebanon and Latin America drives investors away from government debt.

The Bloomberg Barclays index for corporate securities in the developing world is rising for a 12th successive month, while the gauge for sovereign notes is heading for its third decline in four months. That’s sent the ratio between them to the highest level since July 2015 in favor of corporate bonds.

Investors are betting corporate debt is less vulnerable than government bonds to the spreading unrest. Fiscal concerns have returned as governments loosen budget discipline to dodge a global growth slowdown. Meanwhile, year-end caution to lock in returns is reducing demand for sovereign debt, said Richard Segal, a senior analyst at Manulife Asset Management in London.

“Investors have had a good year and they are now switching from sovereigns to corporates, especially away from countries where the political situation has had an impact,” Segal said. “I expect this will go on for a while, perhaps until the first quarter of next year.”

This quarter is the first time since June 2015 that the EM corporate-bond index is heading for a gain while the sovereign gauge is falling. The star of this outperformance is Israel, where bond returns are five times those of the next best performer, Turkey.

In turn, Israel’s gains are being led by Teva Pharmaceutical Industries Ltd., as investors turn confident the drugmaker is on course to resolve a major legal case and whittle down its massive debt load. Teva’s tentative deal with U.S. authorities to settle claims against the company for its role in the opioid epidemic is being seen as credit-positive, according to Bloomberg Intelligence.

Teva’s dollar bonds due 2036 have handed investors 17% this quarter, while five of its other notes have given double-digit total returns as they rebounded from third-quarter losses.

From the sovereign side, the worst performer also comes from the same region. Lebanon’s international bonds have posted a 27% loss this quarter as an economic crisis and a perceived lack of accountability among the ruling class brought people to the streets. That’s sent the government’s borrowing costs soaring. The yield on its March 2020 securities hovers around 98%, meaning there’s a 30% return to be made in the next 111 days.

The other poor performers are Ecuador (a 17.4% loss) and Suriname (minus 9.5%).

In the coming months, Brazil and Indonesia might lure bond investors because of high yields, Segal said.