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Taper Delay Stimulates Debt

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  • Taper Delay Stimulates Debt


    The Wall Street Journal
    Sept 19 2013

    Emerging-Market Countries, Other Issuers Feast as Central Bank
    Keeps Program

    Borrowers dashed into credit markets a day after the Federal Reserve
    decided to keep its stimulus program at full speed.

    By Ben Edwards, Mike Cherney

    Borrowers dashed into credit markets a day after the Federal Reserve
    decided to keep its stimulus program at full speed.

    Emerging-market countries and companies sold at least $5.8 billion
    in dollar-denominated bonds Thursday. The burst of deals included
    junk-rated Armenia's first dollar bond.

    Thursday's bond sales put September on pace to be the most active
    month for emerging-market bond issuance since May, just before worries
    about the fed scaling back-or "tapering‚~@ -its easy-money policies
    took hold, scaring investors away from riskier debt.

    Investor appetite also was on display in the U.S. High-grade and
    junk-rated firms sold at least $9 billion of bonds on Thursday.

    Bond prices, which were hit hard in recent months by tapering fears,
    rallied on Wednesday after the Fed announcement, pushing yields lower.

    The 10-year Treasury note, after surging in price to yield 2.706%
    Wednesday, ticked lower to 2.748% Thursday. The yield was at 2.87%
    before the Fed's announcement Wednesday.

    Money managers and analysts say more bond sales are likely to follow,
    at least in the short term, as issuers capitalize on lower borrowing
    costs and some buyers resume hunting for higher-yielding and riskier
    assets. Many bond investors suffered losses over the summer as yields
    rose on debt of all kinds.

    "The Fed not slowing down their stimulus removes a significant risk
    in the market and has created investor appetite‚~@ for emerging-market
    debt, said Viktor Szabo, a fund manager at Aberdeen Asset Management,
    which managed $318 billion at the end of June.

    Armenia sold a $750 million, seven-year bond to price at a yield
    of 6.25%. The former Soviet state, which is rated BB- by Standard
    & Poor's, attracted $3.25 billion of orders, according to the
    underwriters on the deal.

    Armenia was quickly followed by Colombia and a host of agency
    and corporate borrowers including Brazilian development bank Banco
    Nacional de Desenvolvimento Econ√īmico e Social, or BNDES, and Russian
    engineering firm Borets.

    Bankers are lining up even more deals, with road shows planned for
    the Hungarian Development Bank.

    "We are now likely to see a wave of emerging-market issuers come to
    market to take advantage of still very cheap financing conditions
    and likely pent-up demand from investors,‚~@ said Tim Ash, an
    emerging-market analyst at Standard Bank.

    Investment-grade corporate bonds are alluring as well, analysts say.

    Jennifer Vail, head of fixed-income research at U.S. Bank Wealth
    Management, said the lack of tapering provides an opening for
    investors. Previously, investors were concerned that rates would spike,
    and bond prices fall, if the Fed this month announced a tapering of its
    $85 billion in monthly bond purchases. But after the Fed's surprise
    decision, many market experts believe it will be a few months before
    the tapering begins. So the threat of rising interest rates--which
    decreases the prices of outstanding bonds--is gone for now.

    On Thursday, single-A-rated power-systems company Cummins Inc. sold
    $1 billion of bonds, its first bond deal since 2002, according to
    Dealogic. Junk-rated Sirius XM Radio Inc., which has tapped the
    bond market multiple times this year, sold $650 million, aimed at
    refinancing existing debt.

    Other companies selling debt in the U.S. market Thursday include
    Nissan Motor Acceptance Corp., Reinsurance Group of America Inc. and
    Swedish bank Svenska Handelsbanken.

    Ms. Vail said she sensed a greater opportunity in bonds from banks
    and financial firms, given that those companies are likely to continue
    making improvements as the economy recovers.

    "Now we have this, we'll call it a surge of fresh air, for a couple
    of months,‚~@ she said. "So that gives the opportunity to add to
    those positions without immediate fear of a spike in rates.‚~@

    Companies in Asia took advantage of the reprieve offered by the Fed,
    too. This week saw the most new share sales in Asia since May, while
    Asian companies outside of Japan have sold $15 billion of bonds so
    far this month, the largest sum in four months.

    To be sure, memories of the summer's selloff in bonds and
    emerging-market assets are still fresh, prompting many fund managers
    to be more circumspect about their bets.

    "A lot of people have reassessed their allocations,‚~@ said Nick Hayes,
    a fund manager at AXA Investment Managers, which has ‚~B¨568 billion
    ($768 billion) of assets under management. "People will start to
    differentiate within emerging markets now between what are structurally
    challenged economies and what economies look pretty strong but were
    just beaten up in the selloff.‚~@

    "It was because of tapering that people sold emerging-market assets,‚~@
    he added. "But I don't think everybody that sold will buy back in.‚~@

    -Serena Ruffoni, Prabha Natarajan and Prudence Ho contributed to
    this article.