One day you are hot, the next day you are not – and so it is with Mongolian Genghis bonds which have suffered a sharp market correction in the wake of June’s market rout

August 6, 2013 5:56 pm

Mongolian bonds suffer amid frontier correction

By Pan Kwan Yuk

One day you are hot, the next day you are not – and so it is with Genghis bonds which have suffered a sharp market correction in the wake of June’s market rout. Back in November, eyebrows were raised in the emerging markets debt investment community when Mongolia – a country that has been rescued five times in the past 22 years by the International Monetary Fund – managed to raise $1.5bn at a price below Spain’s borrowing costs. At the time, many took the sale, which was 10 times subscribed and attracted $15bn in bids – as yet another sign that investors who were flushed with cash and desperate for yields were jumping into markets that they did not fully understand.Fast forward eight months and the sceptics appear to have been proved right.

The $500m five-year tranche of the issue is now trading at 92.837 cents to the dollar.

Priced at the outset at 4.125 per cent, yields that investors are demanding to hold the bond have jumped to nearly 6 per cent.

It’s a similar story for the larger 10-year $1bn tranche, which was priced at a yield of 5.125 per cent. The bond is now trading at 87.245 cents to the dollar and yields are now at 7 per cent.

The increases far outpace that seen in US Treasuries. Yields on US 10-year notes have gone from 160bp at start of May to 265bp.

In many ways. The sharp correction in frontier market sovereign and corporate debt should not come as a surprise.

The surge in investor interest for debt from frontier markets has been mainly driven by hollowed-out returns in the developed and more established emerging markets.

But with the US Federal Reserve expected to begin scaling back its massive bond buying programme leading to higher interest rates, the investment calculation no longer makes sense.

“It’s reality reasserting itself back into valuations,” said Robert Abad, emerging markets specialist at Western Asset Management.

“The hunger for yield which spawned new issuance from places that, in normal credit cycles, wouldn’t have had easy access to the international capital markets ultimately distorted investors’ sense of valuation and risk.”

“Relatively unknown issuers with no ‘credit history’ accessing the market for $1bn or more at 5-6 per cent yields was surreal back then and even more so in retrospect,” he added.

Investors who bought into the Mongolian bond at the time of issuance are not the only ones getting their fingers burnt.

Those who snapped up Zambia’s $750m 10-year dollar bonds last September at a yield of 5.625 per cent are also sitting on losses.

The bond is currently trading at 88.338 cents to the dollar and have jumped to 7.136 per cent.

Rwanda’s $400m 10 year bonds – which attracted more than $3bn in orders – are now exchanging hands at 89.823 cents to the dollar.

Priced at 6.875 per cent at the time of the issue, yields are now at 8.158 per cent. A bargain if bought now but less so for those who bought at the time of issuance.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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