These local-currency global bonds are not new – sovereigns such as Brazil and Colombia were both active issuers before the financial crisis. Indeed, Brazil sold its first global reais bonds in more than three years last month through a R$1 billion tap of its 2028 notes. The deal, which was priced to yield 8.85% – compared with 10.68% when the 2028s were originally sold in 2007 – was increased from an initial R$750 million on the back of strong demand. One reason was because the government is making it more onerous for foreign investors to invest in the onshore fixed income market through tighter capital controls. An extra R$100 million of the bonds was made available overnight for Asian investors.
Colombia too has been active placing local debt in the international market this year. It sold $800 million of peso bonds due in 2021 in the international markets in April before tapping investors for a further $500 million in July. The latter move took advantage of an upgrade in its credit outlook from Standard & Poor’s. In an illustration of international investors’ enthusiasm for these securities, known as Global TES, the April transaction was priced to yield 7.75%, while the July deal was sold at 6.75%.
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International investors are also showing greater interest in the onshore local markets, despite the more onerous tax burden in some countries. “Foreign investors are playing a much bigger role in the local markets. It used to be just in Brazil and Mexico but now it’s in Chile, Colombia and Peru too,” says Rodrigo Couto, director, fixed-income trading, at BNP Paribas.
“Foreigners mostly hold nominal-rate bonds but they have been diversifying into inflation linkers too. In general, the longer the duration the more foreign participation you see.”
With real rates in Brazil the highest in the G20 and potential returns in other countries attractive too it’s little surprise that international investors are gravitating to the region, despite moves by the Brazilians in particular to stem capital flows. Couto says, however, that yield is only one reason why foreign investors are putting more money into the region.
“It’s portfolio diversification as well as investment for yield and duration,” he says, adding that in many cases these investors are real-money accounts. “Hedge funds tend to be less buy and hold and have a much more tactical approach. They might buy local debt through credit-linked note or total-return swap structures so they don’t even have to open an account onshore.”
The other noteworthy trend is the growth in intra-regional issuance, especially within the Andean countries. Last year, for example, Banco de Crédito del Perú sold $107 million-worth of Chilean peso bonds that mature in 2014.
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