A surge in demand for Sri Lanka’s latest US dollar bond issue is putting a spotlight on the appetite for emerging-market securities, even amid the US Federal Reserve’s tightening campaign.
The South Asian nation garnered more than US$11 billion of orders for the US$1.5 billion of 10-year notes it sold last week, marking a quadrupling in demand compared with its US dollar debt issuance in 2015 and last year.
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 (習近平), Sri Lanka is also benefiting from Chinese demand for investments linked to Beijing’s “One Belt, One 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 US$50 billion in “One Belt, One Road” nations to develop new land and sea trade links with Asia, Europe and Africa, according to a report by Xinhua news agency.
Credit Suisse Group AG analysts expect China to pour more than US$500 billion into the efforts.
China is hosting a summit on the project on Sunday and Monday.
Other Asia-Pacific nations have also sought to tap the dollar bond market, with Mongolia issuing in March and a debut issue by 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 0.25 percentage points in December last year and in March. The central bank is expected to move again next month.
Flows to emerging-market bond funds rose to more than US$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 US$16.7 billion so far this year.
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.
However, he was 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 nation’s outstanding dollar bonds and is now “reassessing” his holdings, he said.
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