Borrowing costs for emerging-market countries from Indonesia to Hungary have fallen to the lowest in more than a year as growth in their economies outpaces the developed world and debt leverage shrinks.
The average yield on developing-market local currency bonds is 6.2 per cent, down from last year's high of 7.11 per cent in March and approaching the lowest since October 2010, according to JPMorgan Chase's GBI-EM Index. The securities returned 2.8 per cent since December, compared with 0.3 per cent for Bank of America Merrill Lynch's Group of Seven index.
Emerging-nation bonds are benefiting from econ-omic expansion that the International Monetary Fund estimates will be 5.5 per cent this year as debt relative to economic output declines, versus 1.2 per cent in the developed world where borrowing is soaring. Emerging-market bond funds bought a record $2.1 billion (Dh7.7 billion) of securities in the week to February 12, including $487 million of local-currency debt, according to RBC.
"Emerging-market fundamentals are strong compared to the poor debt dynamics that plague the developed world," said Edwin Gutierrez, a money manager who helps invest about $7.5 billion in emerging-market debt at Aberdeen Asset Management in London.
Local-currency bond yields fell to 6.17 per cent on February 9, the lowest since October 20, 2010, approaching the record 5.8 per cent in 2003. Yields rose to 9.7 per cent in October 2008 after the collapse of Lehman Brothers Holdings.
Yields on Hungary's 7 per cent bonds, due in 2022 and denominated in forint, fell 143 basis points this year to 8.5 per cent, the biggest drop of 17 local-currency government bonds tracked by Bloomberg. Indonesia's benchmark rupiah-denominated 10-year notes are next, falling 74 basis points to 5.3 per cent .
"New yield lows are being set," said Nick Chamie, the global head of emerging markets at RBC Capital Markets in Toronto. "I wouldn't be surprised to see ongoing downward pressure on emerging-market local-currency yields."
Elsewhere in credit markets, the extra yield investors demand to hold global corporate bonds rather than benchmark government debt is 220 basis points, down from 234 at the end of January, according to Bank of America Merrill Lynch's Global Broad Market Corporate Index.
In Europe, the Markit iTraxx Financial Index of credit-default swaps linked to the senior bonds of 25 banks and insurers rose for a second week last week, climbing three basis points to 222.5, according to JPMorgan Chase.
In the Asia-Pacific region, the cost of insuring corporate and sovereign bonds from non-payment fell, with the Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan decreasing 3 basis points to 162 as of 8:18am in Hong Kong, according to Royal Bank of Scotland Group. The Markit iTraxx Japan index declined 6 basis points to 140 basis points as of 9:23am in Tokyo, according to Deutsche Bank AG.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A basis point on a swap protecting $10 million of debt for five years is equivalent to $1,000 a year.
The Standard & Poor's/LSTA US Leveraged Loan 100 index was at 93.13 cents on the dollar on Friday from 93.42 at the end of the previous week. The measure, which tracks the 100 largest dollar-denominated first-lien leveraged loans, reached a high for this year of 93.55 on February 9.
Emerging-market government debt has shrunk to 34 per cent of gross domestic product from 52 per cent a decade ago, according to the IMF's World Economic Outlook database. That compares with a jump to 107 per cent of GDP from 73 per cent for developed nations in the same period.
Developing countries' debt discipline and efforts to bolster growth are winning rating upgrades as their economies expand.
Indonesia, Southeast Asia's largest economy, was lifted to Baa3, or investment-grade, by Moody's Investors Service on Jan. 18 for the first time since the Asian financial crisis in 1997. Brazil, Latin America's biggest economy, was raised one step to BBB in November by Standard & Poor's. The average S&P rating of bonds in JPMorgan's GBI-EM index is BBB+, the third-lowest investment-grade ranking.
The increases contrast with the developed world, where Europe's debt crisis prompted S&P to strip France of its AAA rating and downgrade other EU nations last month. The US lost its AAA rating in Aug-ust from S&P, which cited the country's political failure to reduce deficits.
Structural reforms in emerging markets such as the easing of trade barriers and privatisations in Latin America and Eastern Europe in the 1990s have helped cut developing country inflation to a projected 5.5 per cent this year, from a peak of 129 per cent in 1992, IMF data show. Slower inflation makes local currency bonds more attractive, because the value of interest payments from the debt is eroded less quickly.
"In the last 20 years, emerging markets have improved dramatically, structurally, their institutional framework," said Michael Ganske, the head of emerging-market research at Commerzbank in London. "Emerging markets are not a sporadic investment scene any more, a lot of international global fixed- income managers have a core allocation in emerging markets."
In Russia, foreign and domestic investors submitted a record 192 billion rubles ($6.4 billion) of bids for government bonds due 2021 at an auction, according to Russian central bank data.