Frontier Markets Debt May Dodge Fed Bullet

Sovereign debt issuance from frontier markets this year may not reach last year’s record levels but new bonds are still likely to be warmly received by investors, says Steffen Reichold, a portfolio manager at Stone Harbor Investment Partners, which manages around $45 billion in frontier- and emerging-markets debt.

With the U.S. Federal Reserve likely to begin raising interest rates later this year, countries are feeling pressure to issue debt while yields are still relatively low, Reichold says. Unlike many analysts, though, Reichold believes emerging- and frontier-market debt may not suffer from the Fed’s impending move.

“There are still a lot of institutional investors looking for yield and that search for yield is likely to be with us for a while,” he says. Emerging and frontier markets could end up benefitting from that, Reichold told WSJ Frontiers.

He did note, though, that enthusiasm for frontier markets this year appears to be lower than in 2014. That won’t stop countries from trying to take advantage of the low-interest-rate environment before the Fed starts to raise rates.

Ivory Coast’s $1 billion bond issue last week may be a sign of that—and the four-fold oversubscription to the offer suggests investors are still keen on African debt. Stone Harbor was among those investors, Reichold confirmed.

Croatia issued a €1.5 billion bond earlier this week that was also more than four-times oversubscribed.

And although Reichold is confident a rising interest-rate environment in the U.S. will affect demand for frontier bond issues, he doesn’t expect the same sort of turmoil that ensued when the Fed in May 2013 originally discussed tapering its bond-buying program. “If we see a taper tantrum again that could be a different scenario but given how long the market has been mentally preparing for that moment — and the Fed has continued to signal it will be a slow move, — chances are not too bad for that move to be less violent,” Reichold says.

The strong recent economic performance of frontier markets is also boosting investors’ willingness to invest in their bond issues, he adds. Nevertheless, governments that are planning on issuing this year “won’t want to wait until after the Fed moves,” he comments.

Write to Dan Keeler at dan.keeler@wsj.com.