The message to emerge from Euromoney’s tenth annual CEE conference was that investors are increasingly attracted to local-currency bonds as a source of returns in a general spread-tightening environment.
Matthias-Leonard Lang, fund manager at KTL, says: ?The full monty convergence play is the local currency play. You get three sources of yield from that play. You get higher return from the coupon. You get improving yields. And you get currency appreciation.?
Lang cites Romania as an example of his play. Spreads on its local currency bonds have tightened by 100 basis points over the past two years. ?Romanian local debt was one of the best horses in my carriage last year?, he says.
Until now, the Romanian local market was closed to foreign investors, though the Romanian Central Bank plans to open the market this year.
Other eastern European local debt looks attractive as a result of continued currency appreciation. Poland plans to increase its volume of local debt this year. Dorothee Gasser, CEE local bond strategist at Banca Intesa, says: ?Our currency models show that, due to high productivity gains, the zloty will continue to appreciate this year.?
Turkey is also attracting foreign investor attention as a local-currency play. Turkish lira-denominated government bonds offer interest rates of 25%, while inflation is only about 10%. Bond maturities in the Turkish lira treasury market are also lengthening, from one year to between two and four.
The present finance ministry is impressing investors with its economic policies.
Barclays Capital’s emerging Europe analysis team has noted that Turkish local bond yields have tightened considerably over the past few weeks, as foreign investors begin to be aware of the pick-up offered in the treasury market. Middle Eastern investors are, apparently, particularly eager buyers.
And in Russia, the more savvy bond investors are looking to get exposure to the growing rouble bond market. The City of Moscow offers a particularly good play here.
The well-rated City is not legally allowed to issue much on the Eurobond market, so it is a regular issuer domestically. The City has brought in excellent economic results in the past 12 months. Indeed, as Moscow mayor Yuri Luzhkov rather pointedly commented to his old rival president Vladimir Putin at a recent New Year celebration, in reference to the president’s often-stated desire to double Russian GDP by 2008: ?Mr President, I can absolutely guarantee you that we will double the GDP of Moscow by 2008.?
It is not just eastern European local currency debt that has caught the eye of foreign investors. Asian local bond markets are also increasingly attractive. The Asian Development Bank says that local bond markets in east Asia tripled in size between 1997 and 2003, with Thailand accounting for the fastest growth.
Some investors have long said that local-currency debt will become an increasingly normal asset class, as hard currency emerging market debt becomes commoditized and spreads tighten to levels normally associated with high-grade corporate debt.
