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(Bloomberg) — The average borrowing cost of emerging-market companies has fallen to the lowest level since January relative to US corporates as global bond investors’ diversification into higher-yielding assets drives an outperformance.
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The yield on the Bloomberg EM USD Aggregate Corporate Index has fallen 19 basis points this month thanks to bond gains in energy companies benefiting from the closure of the Strait of Hormuz and distressed borrowers eyeing restructuring progress. Meanwhile, US securities have seen a yield compression of only 2 basis points as higher Treasury yields and increasing new issuance limit gains.
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The divergent performances have pushed the yield premium for emerging-market company debt over US counterparts to the smallest since Jan. 26, data compiled by Bloomberg shows. The outperformance is driven by oil companies that are helping to bridge a supply gap arising from the Mideast conflict, duration-related technical factors and diversification into high-yield names, said Ninety One’s Alan Siow.
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“The asset class remains underinvested,” said Siow, co-head of EM corporate debt at Ninety One. “The outperformance year-to-date and attractive relative risk-adjusted returns frame an interesting opportunity for allocators at the moment.”
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The EM corporate-bond index trades near a record high as a hunt for yield puts the gauge on course for a fourth successive year of gains. This quarter, the rally leaders are typically oil companies or distressed borrowers.
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China Vanke, which received a credit upgrade from Fitch Ratings after completing a debt restructuring, has delivered investors a 30% total return in its 2027 bond since the end of June. Gran Tierra Energy’s 2031 note has given 18% gains, while other top performers include bonds of Tullow Oil, Kosmos Energy, Braskem, Aegea, SierraCol and Total Play Telecomunicaciones.
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“EM offers resilience against DM counterparts in the face of the global energy shock emanating from the closure of the strait,” Siow said in reference to energy companies. “Higher prices have led to stronger cash flows and improved refinancing prospects, which for the moment are an idiosyncratic rather than generic EM risk-on theme.”
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