A Sweet Spot in Emerging Debt Has Goldman Warily Seeking Yield

(Bloomberg) — The hunt for yield is back for investors in emerging markets, albeit with a cautious twist.




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Quasi-sovereign bonds, notes from companies at least partially owned by a government, are in vogue for firms including Goldman Sachs Group Inc. and Barings LLC that are seeking strong returns amid lots of economic uncertainty.

This debt, which includes some credit risk, pays more than sovereign notes and is often considered safer than pure corporate bonds. A Bloomberg Barclays gauge of emerging-market company and quasi-sovereign dollar debt returned 5.7% since the virus shuttered cities in early March 2020, compared with a 3.3% return from a comparable index tracking strictly government notes.

Investors are weighing concern about the delta variant’s impact on the world’s nascent growth recovery. Those worries have driven down yields, igniting interest in assets that can offer compelling returns alongside risk mitigation.

“Quasis are often a high-beta version of the sovereign,” said Sara Grut, a senior strategist at Goldman Sachs in London. “If you like sovereigns for the carry, it makes sense to look at some of the quasis.”

While the firm’s analysis shows the median quasi-sovereign bond spread with a yield pickup of 80 basis points, energy-linked notes from state-owned enterprises such as Kazakhstan’s KazMunayGas and Azerbaijan’s Southern Gas Corridor could offer even more.

Mexico’s state-owned oil company Petroleos Mexicanos also looks cheap and benefits from its backing by the administration, said Omotunde Lawal, the London-based head of emerging-market corporate debt at Barings. Dollar bonds due in 2050 from Pemex, as the driller is known, yield about 8.1% compared with the 4.1% yield of Mexican government bonds of the same duration, according to data compiled by Bloomberg.

“You get even more comfort from the fact that it’s government-owned and very strategic to the Mexican government,” Lawal said. “It’s really about looking at it as a spread over the sovereign.”

Political risk is heating up from Latin America — where Peru elected a leftist leader — to China, where recent crackdowns have hit borrowers including state-owned enterprises as policy makers double down on efforts to instill financial discipline and curb moral hazard in its credit markets.

Scrutiny of state-linked debt has intensified this year, with investors mulling a potential restructuring of bad-bank China Huarong Asset Management Co. That’s adding to concerns after a pick-up in defaults among state-owned enterprises late last year.

Central Bank Watch

Mexico’s central bank could hike interest rates on Thursday to contain inflation, even as the economy struggles to regain its footing after the worst economic contraction in nearly a centuryTurkey’s monetary authority is expected to leave borrowing costs unchanged on Thursday, despite pressure from President Recep Tayyip Erdogan to cut interest ratesCBRT has pledged to maintain the policy rate, currently at 19%, above both realized and expected inflation, and a price spike in July lifted inflation to 18.95%The Philippine central bank will probably hold its benchmark rate at a record-low 2% on the same day. The peso neared its lowest since May 2020 after the central bank said a reserve-ratio cut is on the table“Reports of a possible RRR cut triggered short covering in USD/PHP,” said Eugenia Victorino, head of Asia strategy at Skandinaviska Enskilda Banken AB in Singapore. “But considering the weak domestic demand, there is no real demand for the pair at this point”The nation will report gross domestic product data on Tuesday. The economy probably expanded 12.6% from a year ago in the second quarter, according to Bloomberg Economics. The two-week strict lockdown in Manila until Aug. 20 is weighing on the growth outlookPeru’s central bank may raise rates by 25 basis points to 0.5% in response to rising inflation and inflation expectations, according to Bloomberg EconomicsBrazil’s monetary authority will release minutes on Tuesday from its latest meeting, in which policy makers lifted the key Selic rate by a full percentage pointRomania’s central bank chief, who has struck a more hawkish tone of late, will present an updated inflation forecast

What Else to Monitor

China is due to report data on consumer and producer price inflation on MondayMexico will release July consumer price data on Monday, offering investors and economists one last look at inflation ahead of Thursday’s central bank decisionThe nation will also release industrial production figures on WednesdayTraders will also watch Brazil’s inflation figures on Tuesday, retail sales data on Wednesday and a reading of June economic activity on Friday for signs of growth in Latin America’s biggest economyIndia will release consumer price inflation data on ThursdayIn Colombia, traders will watch June retail sales on Thursday for clues on how shoppers are behaving amid lingering pandemic riskA flash reading of Russia’s GDP data on Friday will probably show a big rebound during the second quarter, buoyed by stimulus and energy pricesThe same day, Poland is also expected to report a rebound in its GDPMalaysia’s GDP data release, also on Friday, may show the economy expanded by 14.5% from a year ago, supported by a favorable base effect after last year’s sharp contraction due to the pandemic, according to Bloomberg Economics

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