Emerging Markets’ Euroclear Ambitions Boost Bond Returns

(Bloomberg) -- Some of the best-performing debt globally is getting an extra boost as developing nations race to plug their bond markets into the world’s biggest international settlement systems.

Egyptian pound bonds have brought investors a 37% return in dollar terms this year, the best performance in emerging markets. On top of falling interest rates and a recovering economy, government efforts to make local debt eligible in January for membership in Euroclear Bank SA’s bond settlement system have contributed to the rally.

Since Ukraine teamed up with Euroclear’s rival, Clearstream International SA, in May, the share of foreign investors holding hryvnia bonds has gone from zero to more than 12%, helping make the currency’s rally the biggest in the world this year.

Debt chiefs in emerging and frontier markets are seeking ways to pull in some of the foreign capital looking for a home outside the growing pool of negative-yielding debt in developed nations. They’re ticking the boxes to get their high-yielding local bonds included in global indexes by issuing more long-maturity notes as well as taking the technical steps to qualify for the settlement systems that give traders direct access from their computers in London or New York.

“For Ukraine it’s a very big deal, because Ukrainian domestic settlement isn’t especially easy or transparent,” said Paul McNamara, an investment director at GAM UK in London. At the same time, “it’s a ‘nice to have,’ because a bunch of big markets, including Brazil and Turkey, have attracted a lot of foreign capital without it,” he said.

Kazakhs, Serbs

Joining one of the large clearing houses doesn’t always lead to bond returns for investors. Kazakhstan handed investors a loss of 2% last year, largely in line with the emerging-market average, despite signing a deal with Clearstream. Serbia has ambitions to expand its bond market, but its debt has underperformed peers with a 6.7% dollar return this year.

In Turkey, authorities will be looking to emulate the success stories of Ukraine and Egypt as they plan to make their local debt eligible for Euroclear membership.

Though Turkey’s a familiar market for the biggest debt funds, a currency crisis and geopolitical tensions have driven non-resident ownership of lira-denominated debt to a record low, from about a quarter of the total in 2013.

“It opens Turkey to a large number of investors who don’t have local settlement,” McNamara said.

To contact the reporter on this story: Marton Eder in Budapest at meder4@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Alex Nicholson, Constantine Courcoulas

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