Tag Archives: Fixed Income

An Apples-to-Apples Comparison of African Sovereign Debt

I’ve been meaning to do this for months now, and the FT’s Jonathan Wheatley has just done it for me. Herewith, a side-by-side comparison of 10-year African sovereign debt issues from the past 15 months:

Country Issue Date Tenor Size Yield at issue
Zambia Sep 2012 10 years $750 mm 5.625%
Rwanda Apr 2013 10 years $400 mm 6.875%
Nigeria July 2013 10 years $500 mm 6.625%
Ghana July 2013 10 years $750 mm 8.000%
Gabon Dec 2013 10 years $1.5 bn 6.375%

As Wheatley correctly points out, this is a Gabon story as much as it’s an Africa story. There are a lot of ways to slice this, the most immediate being yield differences. Wheatley:

Is Zambia, at 5.625 per cent (cheaper than Spain at the time), really in a different ball park from Ghana at 8 per cent? Yes and no. When Zambia came to market in September 2012, yields on US Treasuries were at their tightest and investors were scrambling for any deal that offered something better.

“There were opportunities to lock in great transactions,” says Samara. “But you still had to have a story to tell.”

Rwanda faced perhaps an even more inviting market, with investors getting so frustrated at low yields in the US they seemed willing to take almost any risk. Even in that environment, however, Rwanda had to pay a lot more than Zambia.

Nigeria and Ghana tell a similar tale of the post-tapering world: the decidedly less risk-on environment that followed comments in May by Ben Bernanke, chairman of the US Federal Reserve, suggesting the end of ultra-loose monetary policy was on the horizon. But Samara says that even in those more difficult circumstances, the right issuers have been able to get bonds away.

I would also point out the dramatic difference between these yields, and the indicative yields of their currencies at the beginning of this year, which I previously discussed here. Pasting those local currency yields into the above table gives us the following:


Country Issue Date Tenor Size Yield at issue Indicative FX yield as of Jan 2013
Zambia Sep 2012 10 years $750 mm 5.625% 9.80%
Rwanda Apr 2013 10 years $400 mm 6.875% 12.30%
Nigeria July 2013 10 years $500 mm 6.625% 14.40%
Ghana July 2013 10 years $750 mm 8.000% 22.90%
Gabon Dec 2013 10 years $1.5 bn 6.375% N/A


The debt yields are significantly lower than the FX yields reported in January (courtesy of Silk Invest). A lot has happened in the world this year to drive this divergence, but what this screams of more than anything to me is the benefit of borrowing dollars in the Eurobond market. 

Put another way, let’s use the example of Nigeria, which is far and away the largest economy of any of these. In an ideal world, an economy like Nigeria should be able to draw a far larger issue size than $500 million, and denominated in naira, but if they did, they would be paying much more than 6.625%. And even in dollars, the $500 million ticket size indicates that appetite is still fairly limited, despite all the currency risk being shifted onto Nigeria (which, having some 90+% of its economy dependent on oil, is less burdensome than the task facing, say, Rwanda).

I’m all for developing local currency financing mechanisms, but what this all says to me is that there’s still a VERY long way to go.

A Tale Of Two Bond Curves: Malaysia vs Indonesia

Thanks to Denise Law for drawing my attention to this…

Malaysia government bond yields fall post-elections:

Govt bond curve - Malaysia May 2013

While Indonesia government bond yields rise after S&P reduced its outlook on Indonesian credit from positive to stable:

Govt bond curve - Indonesia May 2013

Related reading: How Singapore’s currency club fell apart

How Much More Can Emerging Markets Debt Grow?

EM versus US High Yield Bonds riskLondon-based Clear Path Analysis has an excellent report detailing investment considerations for Emerging Markets debt and FX investing. So good, actually, that it’s forcing me to second-guess my previously held view that Emerging Markets debt is in a bubble approaching crisis proportions. It’s a long-ish report (32 pages) and it’s all important, so let’s get straight to some of the notable commentary they’ve put together. I think these quotes really speak for themselves.

Gregoire Haenni, Chief Investment Officer, CERN Pension Fund, on why Asia has and will continue leading EMs:

One of the main reasons why investors are beginning to allocate into EM is because of the Asian sovereign credit re-rating trend. Asian sovereign credit fundamentals have generally been on the up for the last six years which is in contrast to other developed countries. The fiscal discipline and underlying economy growth has capped government debt to GDP without exceptions and trade surpluses over the past decade have resulted in a build up of foreign exchange reserves.
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The Carry Trade Is Not Dead – It’s Just Evolved

My Seeking Alpha article last week on the Mexican peso’s post-rate cut rally prompted this response by a reader:

“Capturing the interest rate differencials across currencies used to be an fx trade, but global monetary accomodative policy has taken the juice out of the carry trade for fx traders. The carry trade has increasingly become a fixed income trade where real money has more tolerance for fx volatility in order to capture higher global yields. To that extent, currencies will in fact benefit where there is a belief that local rates are too high.

I don’t expect further rate cuts, Ulysses. I think the 50bp was an attempt at normalization, perhaps partially due to the increase in real money flows into Mexico that were screaming that rates were too high. The irony that you point out about a stronger peso can probably be attributed as much to the ratings upgrade and correlation with a recovering US dollar. Mexico’s reputation for strong policymakers as well as the convergence of business cycles with the USA, makes it a good laggard candidate to get some beta on the USA. That said, it’s a bit overbought and needs to consolidate if it is going to push much lower.”

To the extent that the Mexico exchange-traded fund, which goes by the ticker EWW, correlates with the peso, it looks like this overbuying has already been priced in. Whether looking at this in terms of absolute price or in terms of returns, the March 8 rate cut coincided with a brief bump in the EWW price which has now reversed course, while the peso remains up. This gap will have to close at some point. The question is when:

2013.03.18.MXN EWW YTD price


2013.03.18.MXN EWW YTD percent

And here’s what the EWW vs. peso relationship looks like over the past year:

2013.03.18.MXN EWW 1 year

Will The Philippines Be The Next Sovereign Upgrade?

Euromoney seems to think so, and I can’t say I disagree:

2013.03.07.Philippines on verge of sovereign upgrade

ECR’s scoring method of risk experts’ opinions is now a well-established alternative to the ratings agencies, not least because of its regular, quarterly updates and rankings approach, with countries placed into five tiered groups based on their total scores. Economists and country-risk experts are asked to evaluate 15 separate indicators.

According to the survey, a credit rating upgrade to the Philippines is long overdue (see chart, above). The sovereign is currently placed above six investment grade borrowers – all in blue – at the top of the fourth of ECR’s five tiered groups. If there is to be a new investment grade the Philippines is a prime candidate – its long-term trend improvement suggests it will soon rise into tier three.

See here for more.

Market Lemmings Finally Wake Up To Original Sin

“The definition of insanity is doing the same thing over and over again and expecting different results.” — Albert Einstein

The FT’s beyondbrics has a chart of the week discussing “Original Sin” in the African context, which in econo-speak, refers to a country which issues debt in a currency other than its own (usually dollars or euros):

2013.03.04.Sub-Sahara-Africa-bond-yields original sin

This should not be a new concern, but somehow in all the hype over EM debt issues last year, the financial news media seemed to overlook this very real downside risk. For those of you unaccustomed to thinking about this stuff, the problem here is pretty basic: if a country–Zambia last September, for example–borrows US$750 million, this means it’s on the hook to pay that back in US dollars. If its own currency, the Zambian kwacha in this case, declines against the dollar throughout the duration of the debt, this increases the cost of borrowing in local terms since it will require more local currency to pay back the US$750 million principal.

In the particular case of Zambia, its capital controls ensure some level of kwacha stability against the dollar, but only so long as those controls hold. How likely they are to hold remains an open question, but we don’t have to look too far back in history to find situations elsewhere in the world when this sort of scenario caused major structural problems. Argentina in 2001 and Thailand in 1997 are two of the most glaringly obvious that come to mind, but there are countless other smaller examples over the years.

Equally worrisome is how beyondbrics closes this revelation:

There remains a slight chicken-and-egg problem: investors are wary as African sovereigns don’t have a great track record, which makes it harder to borrow and for countries to show to agencies and investors that they are worthy of higher ratings and lower yields.

But with more borrowing used to finance infrastructure spending, and developed bond markets offering near-zero returns, bond issues should still find buyers – just perhaps not with as low as the low yield that Zambia enjoyed. As Exotix points out: “fundamentals have not really changed”.

Actually, fundamentals have not really changed in many parts of the world; and yet somehow this higher litmus test is being applied to Africa whereas investors seem perfectly willing to let it ride from Europe to Mexico to US banking stocks.

By the way, this is hardly the first time I’ve pointed out the problems of hard currency debt and original sin. You can go to here, here, here or here for more. 

I hate to say I told you so but…I told you so.

Chart of the Day: Frontier Markets Fixed Income Yields

We would be wise remind ourselves first of the definition of the impossible trinity: it is impossible to have (a) a fixed exchange rate, (b) absence of capital controls and (c) an independent monetary policy.

Remember that. I’m going to come back to that.

So Silk Invest has this going on:

“The chart on the right hand side compares currencies in terms of Purchasing Power Parity. What the graph tells us is that the adjusted value of the Brazilian Real is similar to the US$, while most frontier market currencies are systematically undervalued.”

2013.01.23.Frontier Markets yields

The problem I’ve always had with Purchasing Power Parity is that it assumes equivalent standards of living across markets when in fact that is very rarely the case. Put another way, a dollar may buy more in Brazil than in Vietnam, but this says nothing about what the average citizen in either of those countries needs to sustain a living.

But that’s an argument for another time and another context. Otherwise, this is a very compelling chart. A couple things off the top of my head:

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What Paraguay’s bond issue says about the state of Latam fixed income

Remember that Bolivia bond issue last October that had everyone’s attention for about five minutes? Well Paraguay is now following suit. Meanwhile Mexico’s Treasury ministry is bragging about how historically low yields are some sort of sign of economic health or whatever.

And hey, there’s other stuff happening with Colombia and Brazil, and Argentina’s managed to buy some time in the New York court system and there’s obviously a general global imbalance of sovereign access to debt markets, yes, I am aware of all those things and many more. But in the interest of keeping this tidy, I’m going to focus right now on the most recent Latam issues and attempt some level of streamlining.

So let’s look at some data first. This is as close as I can get to comparing apples to apples:

2013.01.22.Mexico Paraguay Bolivia bonds

And here’s a reminder direct from Mexico’s Treasury on the recent history of Mexican government bond yields at issue date:
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There’s one word for Emerging Markets Debt. And one way to hedge it.

2013.01.11.Emerging Markets debt bubbleEuromoney leads an Emerging Markets debt bubble story with this teaser:

“International money is flying into emerging market sovereign bond markets with frontier credits, such as Zambia, Mongolia and Bolivia, now boasting low yields. The jury is out on whether there is a bubble brewing in developing bond markets in hard currency.”

Um…personally, the jury is in if you ask me. It’s been in for quite a while and I don’t think anyone doubts that there is a bubble. The only question is when it’s going to pop. I mean, seriously folks. Disregard whatever spin you’re hearing from compromised money managers. The facts speak for themselves:
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Has investment grade lost meaning or is Emerging Markets debt overpriced?

The answer to that question may be yes to both. It’s too easy to turn this topic into an indictment of the credit ratings cartel, but the following map from Reuters stands out as an example of a few undeniable realities in the fixed income universe:

2012.12.18.AAA Universe

From JP Morgan via Reuters: Continue reading

Forecasting for the Masses: The Macro Outlook, as told to Mom and Pop

How do you know an investment trend has officially peaked? There’s the old legend about how John D. Rockfeller knew it was time to get out of the stock market when his shoeshine boy started giving him tips. More recently, I know a lot of people of the opinion that when you see an investment trend story in the New York Times, it’s time to close the position. Even more recently, Fast Company Magazine ran some stories about how Brazil is the “hot new” destination for American startup geeks…cue another curtain call.

So I was going through my inbox over the weekend when I noticed an email from my mortgage lender, Wells Fargo, with this subject line: “2013 Economic and Market Outlook for Ulysses De La Torre”.

Maybe this is a new thing, but nobody else I know receives this sort of thing from any commercial or mortgage banker of theirs. Very well then. Is everybody ready for this?

Ladies, Gentlemen, Buyers, Sellers, presenting Wells Fargo Advisors’ Investment Strategy Committee:

2012.12.17.WF Macro outlook 2

2012.12.17.WF Macro outlook 3

Because I really have no room for diplomatic euphemisms, let’s get right to the point: Fixed Income is where it’s at here. Continue reading

Desperate Bullishness on Mexican bonds

Barron’s for whatever it’s worth, has this video on the case for investing in Mexico.

At this point, these arguments aren’t necessarily wrong, but they’re both tired and incomplete to the point that one has to wonder how long it will take before the smart money decides to take the party somewhere else. Video first, then dissection:

“The peso has been stable for several years.”

Really? Looking at the past five years, seems like the Euro has been  more stable against the dollar than the peso has:

Source: Oanda

“If you buy a five-year government bond in Mexico, you get a yield of just over 5%, compared with the US a yield of less than 1%. But what turns a good yield into a great yield is that in Mexico, those five year bonds pay well more than local inflation. Rate of inflation in Mexico is 4.4% and falling. In the US the five-year treasury bonds pay one-third of the rate of US inflation.”

This is apparently what passes for “great” yield today.

“Mexico has its inflation under control.”


“I think you have a better change of getting a positive yield after the rate of inflation in these Mexican government bonds than you do in these US Treasuries. That’s not to say you should dump all your treasuries and go into Mexican government bonds.”

That’s the second-most important quote in the entire interview.

“The institutions in Mexico are not nearly as mature and stable as they are in the US and that creates greater risk, no doubt about it. But one of the things you care about when you buy bonds is you care about what’s likely to happen to the credit rating.”

…and that would be the most important quote.

“If the new Mexican president makes the right kind of changes, they might be due for an upgrade soon.”

And that, my friends, continues to be the nut. “Will I make money there?” is a very different question from “Is it stable there?” Keep those two questions separated and there’ll be happy endings for everybody.

Local Currency Bonds: Managing Expectations for the Masses

First the quote, then a few comments. From Jan Dehn of Ashmore, in the FT:

Local currency government bonds – an investment grade asset class – have particularly attractive features. Exposure today to diversified 5-year duration risk in local bonds pays nearly 500bp more than the equivalent duration exposure in the US bond market, plus the currency upside. The local government bond asset class is set to increase to $20tn by the end of this decade, twice the size of the tradable US treasury market. And perhaps most importantly, the yield on a diversified emerging market local currency government bond portfolio is both more stable and less correlated with US treasury yields than, say, German bonds. This means that anyone wishing to own fixed income when the big sell-off begins in the US treasury market will be better off in local bonds than in any indebted developed markets.

The longer-term case for emerging markets fixed income is even more compelling. Emerging market countries are rapidly converging with richer countries, a process which is still in its relative infancy. The solid fundamentals we observe in emerging markets today – five times faster growth, ten times less debt, and control of 80 per cent of the world’s foreign exchange reserves – are directly attributable to the better policies made possible by the end of the cold war.

This analysis is dead on right, but it’s incomplete and clicking through to the original article doesn’t cover what’s missing. Continue reading

The evolving perception of risk in Emerging Markets

Another interview transcription today, and even though it’s a couple months old, Mark Mobius does say some important things in here that are worth keeping under our hats and they’re at too many points in the interview to just point at time stamps. I’ve bolded what I consider the important stuff. The survey that the interviewer refers to at the opening is a reference to this.

Daniel Enskat, Fund Forum: I wanted to discuss the survey you do each year of the outlook your clients have for emerging markets, where the greatest expectations are. I think you poll 20,000 people in 19 countries or so?

Mark Mobius: That’s right.

Enskat: What are some of the lessons you’ve learned from that?
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Hype vs. growth: China’s Yuan Renminbi in international payments

I’m VERY skeptical about the race to declare dollar extinction/renminbi dominance, but two items have been brought to my attention in the past few days that I thought would look rather nice when mashed up together. The first is this chart, from SWIFT:

How alarmed you are as a result looking at this chart I suppose depends on some combination of what your biases are, how unplugged you are and how alarmed you tend to become at things that contradict your expectations. Let’s consider the observations to make from this chart and some other things and then we’ll come back to what our response should be.
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How the Global Carry Trade Distorts Reality

This is an ongoing conversation I’m having with a few people and there’s no way I’m going to get it all out now, but the core thesis is that “the market”, whatever that even means any more, is confusing optimism and relative value. Since I reside in Mexico, the evidence of this thesis is most obvious to me in the Mexican context, but conversations with trusted sources elsewhere in the world have led me to believe that this not just a Mexican thing but an Emerging Markets thing. And as of today, it seems even SoCal demigod and occasional Egyptian presidential contender Mohamed El-Erian agrees with me: Continue reading

Charts of the Day: China-Africa trade, EM debt default risk, ZH comment cycle

Some interesting graphics I happened to bump into over the past 24 hours:

1. Africa is exporting more volume to China, but as a percentage of the total, China’s take has remained constant for two years now. So you do that math. Other new players in town include Brazil, India, Turkey, South Korea. Check this out:

From the beyondbrics. Continue reading

Chart of the day: Global government bond returns for 2012

Sourced from Reuters:

For the sake of argument, let’s compare this against Silk Invest’s chart of 5-year yields on USD-denominated bonds:

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A no-nonsense approach to Frontier Markets investing from Silk Invest

At what point do bond yields become more a reflection of market crowding than actual risk of default?

London-based Silk Invest last week released their latest white paper, “The Frontier Markets’ Ship is Sailing.” Considering it’s been two months since my last serious look at what Silk Invest is up to, I figured it was time to revisit their research and I’m glad I did because it raises some very important questions.

Be forewarned though that this report does not make specific country or investment recommendations. What it does is otherwise give you a pretty good idea of what you need to approach that decision on your own (or, presumably, invest with Silk Invest). This chart is the most important thing in  the report:

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Emerging Markets 2012: If you insist on stock picking, read this first

Whenever I see Mark Mobius interviewed, in print or television, the reporter is invariably throwing softballs at him and just can’t stop gushing about what a maverick swami master sensei the man is to so many inspired investors the world over from his perch out there in the wilds of Asia. And Mobius never fails to grab the mic and basically sing his book. Mind you, I have absolutely nothing against Mark Mobius–if I were in his shoes, I’d probably play it the same way.

And so it is in a recent interview with Forbes, in which the most interesting part is his discussion of where he’s long and how he’s allocated. But before we look at that, let’s first look at this:

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