In the old days, investors used to demand a higher return for taking on more risk, and would never lend money to a war-torn country such as purchasing ivory coast bonds or fro a county that has defaulted in the past decade.
But those days are now long gone and today’s yield starved investors are more than happy to lend to emerging market countries with rocky pasts, at rock-bottom rates.
At the end of August, Tajikistan (which borders Afghanistan) declared its intention to issue 10-year bonds — its first ever issue — to take advantage of the current credit environment, following Iraq and Belarus (referred to by many as Europe’s last dictatorship), which have also tapped investors this year. Kenya meanwhile has adopted a different approach launching the world’s first ‘mobile bond’, and even Venezuela got in on the action.
The Economist explains: "The bond is marketed at small investors, who ... can register on their phone in a few minutes and invest as little as 3,000 shillings ($29), far less than the 50,000 shillings needed to buy other treasury bonds. ... Success has thus far eluded this particular experiment in technology (and debt), with The Standard - Kenya reporting that in the past six weeks, the M-Akiba has commitments for 170 million shillings, well below the 1 billion shillings the Kenyan government had targeted."
Ivory Coast Bonds Joins the club
Analysts at Macquarie have rounded up all of the emerging market bond issues that have hit the market this year.
The Ivory Coast, which has seen two army mutinies this year, one in January and one in May, attracted $10 billion in bids for $1.9 billion 6.25% bonds during June. In the same month, investors also placed US$9bn for 16-year Senegal bonds at 6.25%, and Argentina issued 100-year bonds at 7.92%. In July and August, Greece issued five-year bonds at 4.63% while Iraq sold five-year bonds at 6.75%. Ukraine’s 10-year bonds are now trading at only 7.3%. For some comparison, the US 10-year is trading at 2.2% and 30-year at 2.8%.
With such tight spreads on offer for some of the world's most untrustworthy creditors, "it seems that the time might be right for even NK or Syria to issue bonds" Macquarie's analysts' joke.
Still, while these rates of return might seem outrageous, the analysts opine that they're just a reflection of a world where "investors perceive that the Fed would be unable to raise the cost of capital and that secular stagnation dominates." Macquarie has claimed before that after a decade of ultra-low interest rates, the cost of capital can now never go up and "might need to continue falling, ultimately perhaps turning negative" unless there is a dramatic shift in public policies or recovery in private sector productivity. For this viewpoint then, Ivory Coast bonds with a yield of 5% to 6% "might end up to be a good investment.”
“No one could possibly expect Ivory Coast to repay bonds, but then the same applies to the rest of the world, as the ‘financial cloud’ ($400 trillion-plus) continues to grow,” the analysts said. “There is simply no alternative to financialization as neither economies can sustain higher rates nor the supply of financial instruments can be curtailed.”