In a surprise to some analysts, Ecuador sold $2 billion worth of 10-year bonds last Tuesday, marking a return to international capital markets after defaulting in 2008. The deal came on the heels of Kenya’s first-ever international-bond sale, which attracted $8 billion worth of orders for two chunks of bonds totaling $2 billion. The Kenya deal was the largest-ever debt sale by an African country.
Some market watchers had predicted that an Ecuadorian bond offer would generate little interest due to the 2008 default.
These two deals, which carry junk ratings, are the latest in a string of bond sales by countries off the beaten track. Many investors now are embracing issuers—and the hefty interest payments on their bonds—that have been shut out of global credit markets until lately. Driving the demand for this debt are the easy-money policies of the world’s major central banks, which has depressed yields on debt of wealthy nations.
Many money managers consider Ecuador and Kenya to be “frontier” markets, a loosely defined term used to refer to countries that are a step below emerging markets but often have better growth prospects. Frontier stocks and bonds have logged better performance than their emerging-market counterparts in recent months, and have attracted increasing amounts of cash from investors. As well, Cyprus is gearing up for its first public bond sale since receiving a bailout a year ago.
“There’s a hunt for yield now because of an improving global economy and lower yields in Europe, Japan and the U.S.,” said Doug Cote, chief market strategist at Voya Investment Management, which has $213 billion under management. Cote said the terms of the Ecuador bond sale were attractive, but declined to say whether his firm participated in the country’s bond sale.
Ecuador’s bond deal was bigger than expected—President Rafael Correa in April said he was anticipating a $700 million deal—and the final yield of 7.95% was below bankers’ initial guidance, indicating strong appetite from fund managers.