In low-yield world, defaulters to get warm welcome back

* Defaulters Ecuador, Greece prepare bonds; Pakistan, Zambia raise 10-yr cash

* Low yields on U.S., euro zone debt to prompt second look at past defaulters

* After Q1 bond issuance tops $100 bln, second wave of riskier emerging credits

LONDON, April 8 (Reuters) - From Greece to Ecuador to Pakistan, countries that not long ago saddled bondholders with multi-billion dollar defaults, are set to re-enter global markets, cashing in on investors' desperate need for higher-yielding assets.

With debt yields in the euro zone at multi-year lows and 30-year U.S. Treasuries offering less than 3.6 percent, investors are again scrambling for higher-return assets - a hunger that such pariah credits, are well placed to satisfy.

Take Pakistan. With a credit rating of Caa1 from Moody's and a default on its books from 1999, it is preparing a two-tranche dollar eurobond later on Tuesday, its first issue since 2007.

The country may be riven by chronic insurgencies and be rated seven notches below investment grade, but it is offering to pay bond buyers over 8.25 percent for 10-year cash. And that to many investors will be a no-brainer - offering them three times more yield than equivalent U.S. Treasury bonds.

"We are in a very low-yield environment," said Jennifer Vail, head of fixed income at U.S. Bank Wealth Management which has $115 billion under management.

"Folks are looking for yield and as long as we are in this kind of environment folks are going to embrace risk."

Vail says she is "not a fan" of such lowly-rated credits as Pakistan but admits the hollowed-out yields on safer bonds are becoming a real problem for many portfolios.

Futures markets are betting on the first Fed rate rise next year but do not expect rates to rise above 1 percent by end-2015, she noted. Contrast that with as recently as 2007 when U.S. interest rates and 10-year bond yields were over 5 percent.

"One percent is a quarter of what normal is. Normal is 4 percent," she said. "So relative to what you get domestically, such yields are attractive ... Folks who are buying these things aren't thinking of the stress - they are thinking of the 8-9 percent coupon."

Pakistan might not expect to suffer too greatly for its history of default - the write-off was small and back in 1999.

In contrast, Ecuador, with seven defaults in its 180-year history, may find its planned $700-million bond a harder sell. Yet its ability to tap the international market at all is remarkable, given that as recently as 2008 the government enraged investors by repudiating $3.2 billion in bonds.

An even bigger comeback kid will be Greece. Just two years after restructuring 130 billion euros in debt, Athens has lined up banks to run a bond issue and investors reckon it could borrow five-year cash at 5-6 percent. Its 10-year bond yields at home are at four-year lows, just above 6 percent.

And many other problem debtors - from Dubai, engulfed in a debt crisis in 2009, to Ukraine which has only just signed up to an IMF loan to avert default - are eyeing the market. Sri Lanka and Zambia, both junk-rated, have also sold bonds this week.

These issues come after emerging governments and companies raised well over $100 billion in bonds in the first three months of 2014. Most were mainstream credits, including Hungary, Poland and Turkey. Now as cash trickles back to emerging debt funds, the door is open for a second wave, of lower-rated credits.

"Many people missed out on the beginning of the emerging markets rebound from a couple of weeks ago," said Jeremy Brewin, head of emerging debt at ING Investment Management.

And investors' memories are short, he said. Data from industry body IIF bears this out, showing it takes an average of 4.5 years for countries to return to market after a default.

Brewin said default risk was high in countries like Ecuador but investors hope that "for a change they will issue a bond that will be repaid - and meanwhile you collect the coupon".


A longer-term factor could also be driving demand.

Pension and insurance firms need higher returns on fixed income. In the United States for instance, the retirement of 78 million baby-boomers, born from 1946 to 1964, is boosting demand for fixed-income assets with higher-coupon yields.

Many of these funds may have no recourse but to venture into higher-risk bonds if they are to match future obligations.

"For the individual investor who needs to generate income for retirement, we think they should consider a portion of allocation into high-yield and emerging markets," said Vail at U.S. Bank.

Brewin of ING noted that a European pension fund that bought French government bonds 10 years ago at 4.5 percent will receive less than half that if it reinvests the proceeds of maturing debt into fresh 10-year bonds.

"They cannot afford to have too much deterioration so they look through emerging markets," he said. But with mainstream emerging bonds offering only 2 percentage points more yield than investment-grade credits, many had appetite for even more risk.

"That's one reason they are trying to allocate a small part of their assets to frontier market funds," he said, citing the interest in buying assets from lower-rated, faster-growth markets such as borrowers in sub-Saharan Africa.

Insurers and pension funds took six percent of Zambia's 10-year dollar bond launched on Monday, Thomson Reuters service IFR reported. Rated B-plus/single B or four to five notches into junk territory, the issue paid 8.625 percent.

That looks attractive not just when contrasted with the 2.7 percent paid on 10-year U.S. Treasuries but also against Western junk-rated corporate debt and investment-grade emerging credits.

Average yields on the Barclays index of U.S. high-yield debt are just over 5 percent after a months-long rally and bonds from strong developing economies such as Mexico pay even less.

Signs are, therefore, that Greece and even Ecuador are likely to get a strong reception from investors when they return to market.

James Barrineau, a portfolio manager at Schroders, noted that Ecuador had only one bond outstanding and little debt. He said he would consider buying the paper, depending on yield:

"Ecuador's story may not be spectacular but after they defaulted they really lightened up on debt and people do look at debt levels," Barrineau said. "Besides there are not a lot of places where you get that kind of yield."

(Additional reporting by Davide Scigliuzzo of IFR; Editing by Alastair Macdonald)