Emerging bonds this year. The riskier the better.

April 18, 2011

Politics have turned nastier than usual this year in emerging markets. Nonetheless, if you were a buyer of emerging bonds, you would have been ill-advised to play safe. That’s because the best performing emerging credit so far this year is Ivory Coast, which at the end of January effectively defaulted on its $2.3 billion dollar bond. Yes really, according to JP Morgan, which runs the most widely-used emerging debt indexes.

That’s because the bond has risen about 15 points since the start of the year on hopes Alassane Ouattara — seen as the rightful winner of last year’s election — would wrest back the presidency from Laurent Gbagbo who had refused to quit ofIVORYCOAST/fice. Ouattara, now installed in the presidential palace, is expected to honour the bond. So if you’d bought this bond at the end of December you would have earned a notional return of 25 percent, according to JP Morgan. The index overall has returned just 1.6 percent.

In second place? Ecuador. It too defaulted in 2008 — on $3.2 billion in bonds — but has benefited recently from oil prices at well over $100 a barrel. That should help its economy grow 5 percent this year.  Another oil power, Venezuela, is in third place. Its bonds may be trading at a 10 percent yield premium to U.S.  Treasuries, reflecting its riskiness, but Venezuelan bonds returned close to 10 percent so far this year, JP Morgan told clients. Many fund managers have piled in, noting  that despite the unpredictability of its President Hugo Chavez, he is raking in oil export revenues and  has never shied away from repaying debt.

“In 1998 when oil was $11 a barrel, Chavez paid his Eurobonds, oil is now at $118,” notes Brett Diment, head of emerging debt at Aberdeen Asset Management,.

Hungary, Georgia, Jamaica — none of them famous for policymaking excellence — are the next best performers on JPM’s EMBIG emerging bond index. Hungary is also the top performer on JP Morgan’s local debt index, making a return of 21 percent.

But there do seem to be limits. The worst performers this year are Egypt, which ousted a president this year,  and Belarus, which is fast running out of cash.

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