The growing market in "developing country sovereign bonds" can offer yield advantages compared with similarly rated bonds. It's a market in which the buyers are institutions and savvy investors, but average investors may soon be able to participate through mutual funds.
The market is growing because of the Third World debt crisis. Developing countries borrowed huge amounts in the 1970s and were unable to repay. Since 1982, the banks that hold those loans have been rescheduling payments.
To get unwanted loans off their books, many banks began to trade or sell them at deep discounts from face value. This led to a secondary market. As the loans became securitized or collateralized, they began trading as bonds.
Most of these bonds (about $40 billion of $57 billion outstanding) are "exchange bonds," where commercial banks received bonds for their loans. The largest issue of exchange bonds is the $33 billion in "Brady bonds" issued in March that resulted from debt negotiations with Mexico. There are other debt renegotiations under way that probably will create more bonds.
As many of the roughly 130 developing nations come to rely more on bond issues than loans to raise money, the market will grow even more.
Sophistication comes into play in evaluating a country's creditworthiness and its ability to make payments on its bonds.
Investors who feel comfortable in the market can find bonds yielding from 13 percent to 20 percent, with credit quality equivalent to BB or B rated issues.