Mongolia Invades Debt Market With Genghis Bonds

Mongolia is the new Zambia.

Back in September, Zambia snagged the market’s attention when it managed to issue 10-year bonds at a price only slightly above Spain’s borrowing costs.

Wednesday, Mongolia is in the spotlight, as it sells dollar bonds, tentatively nicknamed Genghis Bonds, with borrowing costs that look set be cheaper than Spain’s. The central Asian state said it wants to sell its 10-year bond at a yield of up to 5.25%. For the five-year tranche, it is aiming at up to 4.25%.

For a comparison, outstanding 10-year bonds from Spain, the fourth-largest economy in the euro area, yield about 5.4%. The country paid a little more than that in a 10-year auction in October.

Those yields for Mongolia make sense, according to frontier-market fans.

“It’s one of the fastest-growing economies in the world, with greatly improved policies, and Mongolia is considerably less likely to default in the next few years than Spain,” said Charles Robertson, chief economist at Renaissance Capital.

Pessimists, meanwhile, are convinced that Mongolia’s deal is yet more evidence that investors, flush with cash and desperate to avoid the euro area’s shakier states and its low-yielding core, are putting cash to work in bets they don’t fully understand.

“There’s no way people buying this have had time to look at what Mongolia is all about. They just buy stuff because they have money and they suspect inflows will continue. Honestly, the closest thing to that is the dot-com rally,” said one such analyst Wednesday. Not a fan, then.

The best line is probably somewhere in between the two. This migration into unusual areas of government debt does have some bubbly qualities. But as long as the music is playing, why stop dancing?

As Renaissance Capital’s Robertson added: “Yes, we’re in a hard-currency bond bubble, but we’re not close to that bursting yet.” It could burst when the Federal Reserve eventually starts raising interest rates again. It could burst if the situation in the euro zone deteriorates sharply, but then, as that would likely boost demand for dollar assets, dollar bonds such as Mongolia’s could find themselves in favor.

So for now, pessimists will keep on grumbling, and unusual countries are likely to keep on issuing debt. Where next? Stick a pin on a map.