GO
Loading...

Argentine woes fail to deter EM bond fans

Argentina's debt default drama has failed to deter investors from emerging and frontier market bonds, as the hunt for returns in a low-yield environment continues.

Even as markets mull whether Argentina will repay the $1.3 billion it owes, debt issues by low-rated frontier markets—those that are less developed than more established emerging markets like China and Brazil—have met with high demand.

Read MoreArgentina on the precipice? Maybe, says S&P

On Tuesday, B/Caa1-rated Ecuador successfully launched its first international bond since its $3.2 billion default in 2008. The transaction raised $2 billion of 10-year funds at a yield of 7.95 percent, which was tighter than expectations for the low-8 percent region. The success came despite the country recently tapping a $400 million loan from Goldman Sachs, borrowing billions from China, and instituting a buyback program on its defaulted debt to pave the way for this issue.

Elsewhere this week, B+/B1-rated Kenya raised $2 billion from international investors in its debut bond issue. The deal was divided into a 5-year bond yielding 5.875 percent and a 10-year yielding 6.875 percent, and was reportedly more than four times oversubscribed.

Investors have reason to be wary of both deals, due to credit worthiness and Argentina-contagion concerns about Ecuador, and recent terrorist activity in Kenya. However, ongoing stimulus efforts by the major central banks of the U.S. Federal Reserve, European Central Bank and the Bank of Japan have kept bond market yields low. This has piqued investors' interest in riskier emerging market and high-yield corporate debt, for which returns are higher.

Read MoreWith yields so low, which bonds should you buy now?

Narvikk | E+ | Getty Images

Marc Chandler of Brown Brothers Harriman said he was uneasy about the high prices commanded by deals like those from Ecuador and Kenya.

"We remain concerned that weaker emerging market credits are issuing debt now at such depressed yields, but the quest for yield by global investors continues," he wrote in a research note on Wednesday.

However, other investors remain fans. Julius Baer, for instance, recommends shifting into inflation-linked and hard-currency emerging market bonds out of high-yield corporate debt.

Read MoreAfrica is hot, but will investments pay off?

Societe Generale is positive on euro-denominated emerging market bonds, which it said were about 20 basis points cheaper than their U.S. dollar equivalent.

"Emerging market euro bonds are trading particularly cheap relative to the U.S. dollar ones," Regis Chatellier, a strategist at Societe Generale, said in the note.

"Polish, Croatian and Mexican euro bonds have the highest chance to mean-revert to their historical levels relative to their U.S. dollar peers," he added.

—By CNBC's Katy Barnato

Contact Bonds

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More