Emerging corporate bond boom stretches into 2013
The boom in emerging corporate debt is an ongoing theme that we have discussed often in the past, here on Global Investing as well as on the Reuters news wire. Many of us will therefore recall that outstanding debt volumes from emerging market companies crossed the $1 trillion milestone last October. This year could be shaping up to be another good one.
January was a month of record issuance for corporates, yielding $51 billion or more than double last January’s levels and after sales of $329 billion in the whole of 2012. (Some of this buoyancy is down to Asian firms rushing to get their fundraising done before the Chinese New Year starts this weekend). What’s more, despite all the new issuance, spreads on JPMorgan’s CEMBI corporate bond index tightened 21 basis points over Treasuries.
JPM say in a note today that assets benchmarked to the CEMBI have crossed $50.6 billion, having risen 60 percent year-over-year. Interest in corporates is strong also among investors who don’t usually focus on this sector, the bank says, citing the results of its monthly client survey. One such example is asset manager Schroders. Skeptical a couple of years ago about the risk-reward trade-off in emerging debt, Schroders said last month it was seeing more opportunities in emerging corporates, noting:
Stronger economic growth in developed markets and because of surging new issue volumes which permit investment in a greater variety of companies and countries.
There could be headwinds however. One could be a rise in Treasury yields that would make higher-risk assets less attractive. Corporate bonds are less well cushioned than in the past and many see valuations as looking a tad rich after last year’s 150 bps spread compression on the CEMBI. Certainly, hardly anyone expects the kind of double-digit yields that came through in 2012.
But many reckon the risks from U.S. Treasuries will be far greater for U.S. high yield and emerging sovereign debt. According to Mike Conelius, who runs an EM bond fund at T.Rowe Price:
(EM corporate) yields generally exceed those of corporate bonds in the United States, and companies in many cases are conservatively leveraged and managed with large cash reserves and little debt on their balance sheets. Yet they have a greater tailwind for growth, and the asset class is benefiting from investors’ search for yield.
Fans of the sector will point out that the CEMBI yield on average is still 320 basis points over Treasuries, while the EMBI Global sovereign bond index trades around 275 bps — in these yield-scarce days that 45 bps represents no mean pick-up.