Mongolias debut bond issuance was off to a great start on
October 29, attracting $15 billion-worth of interest 10
times more than the $1.5 billion issued for the 10- and
The bond was equal to one-fifth of the size of Mongolia's
economy, and its demand equated to twice the country's GDP. The
deal, the biggest in Asia for more than a decade, is so
substantial that the country does not even have net
international foreign exchange reserves to cover
Investors were attracted to Mongolias
robust GDP growth (17.5% in 2011), wealth of natural resources
and proximity to Asian heavy weight China.
However, after the landmark issue, the government of
Mongolia ran in to trouble after spats within the coalition
threatened to derail the government, triggering bond yields to
A minority member of Mongolias fragile coalition, the
Mongolian People's Revolutionary Party (MPRP), last week
announced it would quit the countrys ruling coalition in
protest of MPRP leader Nambar Enkhbayars arrest on
charges of corruption.
The onset of political instability in Mongolia has brought
to the fore questions surrounding emerging market fundamentals
and whether there is a bond bubble emerging in the
So far this year, there has been more than $400 billion EM
bonds issued, up approximately 60% on last year, way above the
2010 record at $284 billion. November was the second most
active month of the year after September for emerging market
Yield-hungry investors' demand for hard-currency denominated
emerging market sovereign debt is a well-known phenomenon. And
during liquidity-fuelled rallies, investors have been
bitten on countless occasions, particularly when the size of
the transaction triggers debt sustainability concerns. For
example, in October 2008, Seychelles defaulted on its $230
million bond after an economic crash made servicing the
transaction unfeasible - since it represented 40% of the island
third round of quantitative easing was announced on
September 13, there was a massive jump in demand for emerging
market debt, says Andre de Silva, deputy head of global fixed
income strategy at HSBC in Hong Kong. In absolute terms,
hard currency debt was the biggest beneficiary of liquidity,"
he says. "But local currency debt saw the sharpest increase in
growth as investors sought to lock in currency gains. At
the same time, the allure of low rates, triggered new issuance,
from corporates and sovereigns alike.
Western central banks are keeping rates at artificially
low levels and bank lending has dropped off, says Mark
Whitcroft, director of debt syndicate at Deutsche Bank based in
Singapore. "As the rates trend remains low and credit spreads
have continued to compress, the international bond market
remains a compelling alternative for funding," he says.
While analysts reckon the biggest risk-reward trade-off remains
the high-yield sector, and in China, in particular, the
sovereign debt market, in general, will remain buttressed by
strong growth and consistent demand for an asset class that is
still, relative to G7 credit, in short supply.
Citing elevated demand for emerging market corporate
debt, Shamaila Khan, head of emerging markets corporate debt at
AllianceBernstein, warns that investors need to wake up to
corporate governance concerns, capital structures and
Top-down, the market looks well and will continue to look
this way, said Khan. "Bottom-up, there are some concerns
and there could be potential for a bond bubble."
De Silva at HSBC, however, argues there is not a bond bubble
on the horizon, but it is possible that in some cases,
valuations have been overstretched. There could be bubbles
within certain asset classes, but it is too early to
He adds: With the onset of Basel III, banks' liquidity
might dry up and there could be constraints in the secondary
market, and there could be problems with the high yield
Khan agrees that
high yield could prove to be a tricky sector, especially in
China. The market is fairly young, and there has been
strong demand from private banks in Asia and beyond [for
Chinese high yield]," she said. "But there is structural
subordination in the bonds the company fundamentals dont
reflect bond valuation.
Nevertheless, investors agree there is definitely value in
the asset class, but some less-experienced investors are
uneducated about the fundamentals of the bonds and do not
discriminate between credits.
A few negative events will trigger investor caution
when it comes to emerging market debt but we dont really
know when people will start focusing more on fundamentals.
Overall, however, we do see a positive scenario for emerging
market corporates, said Khan.