Bond yields too low? There's always Rwanda

Last summer, Euro zone member Spain was struggling to borrow money for 10 years at a yield below seven percent. Last week, Rwanda had no trouble.

Rock-bottom interest rates in the developed world have left investors scrambling for yield, while economies in the developing world are eager to raise capital to boost their economies and reduce their dependence on international aid. The result in the past few years has been a frenzy of unfamiliar names issuing dollar debt, and finding huge demand.

Investors may regard any kind of debt as a safer harbour than equities, shrugging off specific country risk.

Latest was Rwanda, still recovering from the 1994 genocide. Orders for the East African country's debut dollar bond last week reached $3.5 billion, more than 8 times the bond's issue size.

"In a market where you constantly get burnt trading fundamentals, traders are going to the other extreme, ignoring fundamentals and just looking for yield," said Manik Narain, emerging markets strategist at UBS.

"It's really reaching bubble-like proportions."

Single-B rated Rwanda issued dollar debt at a yield of 6.875 per cent, paying not much more than Euro zone member Slovenia, which issued 10-year debt on Thursday at six per cent. Rwanda's yield is below the seven per cent threshold which investment grade-rated Spain briefly breached last July, before the European Central Bank's OMT bond-buying plan helped to dampen yields.

And, Rwanda is not alone. Other debut or infrequent borrowers to issue debt in the last two years span the continents, including Bolivia, Nigeria, Mongolia and Zambia. Bolivia issued a 10-year bond at 4.875 per cent. Zambia paid 5.625 per cent.

Bangladesh and Papua New Guinea are expected to issue maiden dollar bonds soon, while previous borrowers such as Panama have been adventurous in maturity, issuing a 40-year bond last week.

With the Bank of Japan the latest developed world bank to print money, keeping official rates and yields at low levels, it doesn't take much to make the yield attractive on a frontier market bond. "You add a spread for liquidity or ratings, you are still looking at borrowing costs of six-seven-eight percent. That's affordable," said Stuart Culverhouse, chief economist at frontier markets broker Exotix. "Yields are so low because policy rates are so low."

Exotix estimates 35 frontier sovereigns have issued dollar or euro debt since the start of 2012 totaling $32 billion, including at least nine first-time borrowers.

Investors such as pension funds looking to cover liabilities are finding that even mainstream emerging market debt is yielding on average below five percent, near record lows, according to JP Morgan's widely-watched emerging sovereign bond index.

Investors are also slowly increasing their allocations for emerging markets, to match their share of global growth. Goldman Sachs predicts developed markets' share of global GDP to shrink to 31 per cent by 2050, from 63 percent in 2011.

"Sources of capital have had a rotation into emerging markets and by extension frontier markets, that has been playing out for the last couple of years and may be expected to continue," said Culverhouse. "Many people like the story."

Outstanding emerging market government and corporate debt is currently estimated at around $10 trillion, a fraction of the $100 trillion estimated for the global bond market. Frontier debt is also finding buyers because of supply shortages due to overall redemptions of debt by more conventional emerging market borrowers.