Rwanda as Bellwether

Chidem Kurdas
Two weeks ago investors placed $3 billion in orders for bonds issued by Rwanda, a country with a GDP of $6.4 billion.

SomeAfricans suggest that the success of the wildly over-subscribed $400 million issue was evidence of global investor confidence in the Rwandan government. Be that as it may, the dramatic event brings to mind the bubble question.

B-rated Rwanda’s sovereign bonds are arguably not a bad investment compared to C-rated junk paper issued by troubled American businesses, also snatched up by yield-starved investors. And you’ll be helping a poor country recover from the ravages of its genocidal past, though the buyers are after yield rather than altruistic aims.

It’s not only Rwanda. African sovereign bonds in general are all the rage, with the strong demand keeping prices high.

Asset manager Schroders’ chief economist Keith Wade says we could see a bubble but it is too early for a reversal; central banks are driving markets and they will continue to intervene. The liquidity they provide is behind the equity rally.

The excess liquidity provided by central banks also moves to other assets such as African debt, which pay well compared to the Apple bonds that sold like pancakes.

We’re in an unstable equilibrium is how Karl Dasher, Schroders head of fixed income, describes the debt market.

How will we know if a bubble forming? Wes Sparks from Schroders asks the key question: Are high-yield valuations becoming detached from fundamentals? He does not think this is the case right now.

He says he is growing uncomfortable with high-yield prices. Yet investors are not leaving bonds; the money going into equities is coming from cash. Aging populations in developed economies will continue to need fixed income for their retirement portfolios, that will continue to support the market.

But be careful with triple-C bonds, Mr. Sparks warns. Collateralized loan obligations that pool these may fail to meet obligations and have to restructure. He sees risk in the erosion of debt covenants.

Against that background, the African bonds don’t look so bad.

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