(Bloomberg) -- Burgeoning demand for junk-rated sovereign debt is prompting comparisons with some of the frothiest bouts of yield-hunting in emerging markets, but with major caveats.

Recent debt sales in Africa show how investors are snapping up riskier bonds as the prospect of interest-rate cuts in the US takes benchmark yields off their peaks.

Kenya, rated five levels below investment grade at S&P Global Ratings, got orders for more than three times the $1.5 billion it put on sale Feb. 12. A week earlier, Benin’s dollar bonds were more than six times oversubscribed. It was a similar story for Ivory Coast’s sale in January, when it offered the first eurobond from the continent since April 2022. Total sub-Saharan issuance has already surpassed Goldman Sachs Group Inc.’s forecast of $4.5 billion for the entire year.

“The last time we saw an outbreak of yield chasing akin to this one was in mid-2018 or so,” said Peter C. Earle, senior economist at the American Institute for Economic Research. At the same time, “the undiscriminating emerging market bidders that we’d seen for many years are probably gone,” he said.

In the years before the pandemic, emerging and frontier borrowers attracted eager bond buyers as waves of central-bank purchases and stimulus turned yields negative on nearly $16 trillion of debt. Tajikistan, the poorest state in central Asia, epitomized the froth, netting more than $3 billion in bids for its $500 million debut in 2017.

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As economies buckled amid the Covid-19 lockdowns of 2020 and 2021, a slew of defaults followed. There were 14 separate default events since 2020, across nine different sovereigns according to Fitch Ratings. That compares with 19 defaults across 13 different countries in the preceding two decades. 

Supportive Backdrop

Ghana, among the last issuers to sell in March 2021 before investors turned cautious, reneged on its debt a little more than a year later.

This time round, a default loop isn’t in the cards, according to Earle and other emerging-market specialists. With the Federal Reserve eventually set to ease policy, the backdrop is much more supportive for high-yield issuers.

“The key difference is the direction of US rates,” said Charlie Robertson, head of macro strategy at FIM Partners UK Ltd. in London. “Debt loads are manageable if markets are prepared to roll over debt, and last month’s issues show Africa can roll over.”

Samy Muaddi, head of emerging markets fixed income at T. Rowe Price Associates, Inc. agreed.

“For developing nations the loosening of financial conditions and resumption of market access is unequivocally positive,” he said.

“This allows space for the development of a more considered treasury strategy.”

News that Zambia could conclude its debt revamp soon may also support investor appetite for high yield issues. Its dollar debt jumped Monday after the government said over the weekend that China and India, the last two nations needed to sign a deal to restructure Zambia’s debt, have done so.

Nigeria, Angola and El Salvador have bonds coming due in 2025 and are “prime contenders” to issue next, according to Morgan Stanley analysts. “External factors are shifting in the right direction,” they wrote. “It would be credit-positive if they are able to issue.”

At the same time, investors are still coming to terms with the shift higher in developed-market yields. Given the returns available on safer debt, they’re having to pick more carefully among emerging and frontier assets, with a focus on nations that keep a lid on spending or show progress on reforms.

Investors aren’t in a “buy anything if the yield is high enough” mindset, but a “buy anything with good fundamentals and high yield,” said Franck Bekaert, senior emerging-market analyst at GimmeCredit.

Increasing action from multilateral lenders like the International Monetary Fund and World Bank has also reduced the risks.

The Washington-based IMF provided more than $50 billion to the region between 2020 and 2022 — more than double the amount disbursed in any 10-year period since the 1990s.

Read More: US, China Discuss Plans to Avoid Emerging-Market Defaults

That support could also help lower the cost of borrowing for the recipients by creating a scarcity premium on their bonds, according to Shamaila Khan, head of emerging markets at UBS Asset Management.

“We can start to see more issuance from higher yielding countries,” she said. “But considering the availability of additional funding from concessional sources it is going to be significantly lower than historical levels.”

All told, emerging-market sovereigns have sold a combined $57.7 billion in dollar bonds so far this year, crossing last year’s level to become the biggest since 2002, according to Bloomberg calculations.

What to Watch:

  • There will be rate decisions out from Israel, Nigeria and Hungary. This will be Nigeria’s first interest rates decision since Olayemi Cardoso took over the helm of the central bank in September
  • Hungary’s parliament is set to ratify Sweden’s NATO accession as its spring session gets underway
  • Unemployment data will be released in Chile, Russia, and Mexico
  • Growth figures will come from Brazil, India, Czech Republic and Turkey, while Sri Lanka, Pakistan and South Africa give updates on trade
  • Russian President Vladimir Putin gives his annual address to the nation’s Federal Assembly.
  • Investors will also watch China official PMI, Caixin manufacturing PMI

--With assistance from Srinivasan Sivabalan.

(Updates with details on Zambian overhaul, EM issuance total)

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