Chinese Buyers Behind Surging Demand For Latest Bonds

A surge in demand for Sri Lanka’s latest dollar bond is putting a spotlight on the appetite for emerging-market securities, even amid the Federal Reserve’s tightening campaign.

The small South Asian country garnered more than $11 billion of orders for the $1.5 billion of 10-year notes it sold last week, marking a quadrupling in demand compared with its dollar-debt issuance in 2015 and 2016. Chinese banks participated in arranging the sale for the first time, underscoring Sri Lanka’s deepening ties with Asia’s biggest economy.

Strategically located along the maritime Silk Road route championed by Chinese President Xi Jinping, Sri Lanka is also benefiting from Chinese demand for investments linked to their government’s Belt and Road development initiative. Three people involved in the bond sale noted the presence of Chinese buyers in the allocation.

Since Xi introduced the Silk Road initiative in 2013, China has invested more than $50 billion in Belt and Road countries to develop new land and sea trade links with Asia, Europe and Africa, according to a report by the official Xinhua News Agency. Credit Suisse Group AG analysts expect China to pour more than half a trillion dollars into the efforts.

Other Asia-Pacific nations have also sought to tap the dollar bond market, with Mongolia issuing in March and a debut issue from Papua New Guinea mooted for this year.

Emerging-market bonds have continued to thrive even after the Fed began accelerating the pace of rate hikes over the past half year, lifting its benchmark by a quarter percentage point in December and March. The central bank is expected to move again in June.

Flows to emerging-market bond funds rose to more than $2.5 billion in the week to May 3, a 14th week of net gains, according to data compiled by consultancy EPFR Global. Inflows to hard-currency developing-nation debt funds total $16.7 billion in 2017.

Chinese demand “is certainly positive if it means that these frontier countries can tap into a more diversified investor base,” said Mark Baker, investment director for emerging-market fixed income at Standard Life Investments Ltd. in Hong Kong. He was, however, concerned about Sri Lanka’s “lackluster” exports and expensive currency.

“We are surprised by how tight credit spreads have now reached relative to its fundamentals,” said Baker, who stayed out of the Sri Lanka issue. He already had some of the country’s outstanding dollar bonds and is now “reassessing” his holdings, he said. (Bloomberg)

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