Developing-nation junk bonds are gaining at the slowest pace in six months after the lowest-rated companies sold more international debt in seven weeks than during the whole previous year.

Companies issued $6.5 billion of below investment-grade debt since July 16 after selling $4.95 billion in the prior 12 months, data compiled by Bloomberg show. The yield premium compared with Treasuries narrowed 71 basis points, or 0.71 percentage point, in August to 11.45 points, the smallest monthly contraction since spreads widened in February, according to JPMorgan Chase & Co.
Junk bond sales surged even as the default rate for the securities jumped eight-fold in the past year amid the global financial crisis, according to ING Groep NV. The U.S. jobless rate reached a 26-year high of 9.5 percent in June, curbing demand in the world’s biggest economy for developing-nation exports. Growth in emerging-market economies will slow to 1.5 percent this year from 6 percent in 2008, the International Monetary Fund forecasts.
“The market has such a short-term memory,” said Juan Cruz, a corporate debt analyst in New York at Barclays Plc, whose fixed-income research group was voted best in an annual survey by Institutional Investor magazine published Sept. 1. “People are reaching for yield because spreads have come down so much. If we have a major upset with regard to the U.S. recovery, then you will have a global re-pricing of risk.”
Latin American companies with sub-investment grade ratings -- below Standard & Poor’s BBB- and Moody’s Investors Service’s Baa3 -- accounted for seven of the 13 such sales in emerging markets in the past seven weeks. There were 54 junk bond sales in the U.S. over that period, totaling $20.4 billion.
Mexican homebuilder Servicios Corporativos Javer S.A.P.I. de C.V. in Monterrey sold $180 million of five-year bonds with a 13 percent yield. Cosan SA Industria & Comercio, a Brazilian sugar processor in Piracicaba, agreed to pay about 9.6 percent on $350 million of bonds maturing in 2014. Both are rated BB- by S&P, three levels below investment grade.
“The market has been surprisingly open to a wide variety of credits in a way that would have been absolutely shocking six months ago,” said David Bessey, who manages more than $8 billion of emerging-market debt at Prudential Financial in Newark, New Jersey.
Developing-nation companies were frozen out of international markets after the global credit crisis prompted investors to shun all but the safest securities. There were no emerging-market junk bond sales in the six months through March 2, according to data compiled by Bloomberg.
Yields jumped to as much as 22.8 percentage points over Treasuries in December from 801 points on Sept. 12, the last trading day before Lehman Brothers Holdings Inc. collapsed in the world’s biggest bankruptcy, JPMorgan data show. The gap narrowed on Aug. 7 to 11.35 points, its smallest in 10 months, before widening back out to 11.56 points on Sept. 3.
Emerging-market corporate junk bonds returned 4.8 percent in August, the worst monthly performance since they tumbled 7.2 percent in February, according to JPMorgan.
Of the $129.8 billion of emerging-market junk debt outstanding during the 12 months through July, 7.23 percent fell into default, up from 0.81 percent in December, according to ING. Sixteen Latin American companies defaulted in 2009’s first half, including Monterrey-based glassmaker Vitro SAB, according to Moody’s. The global default rate for junk-rated companies was 10.7 percent over that time, Moody’s data show.
(Source: Bloomberg)