The Petroleos de Venezuela SA, Amuay refinery

April 8 (Bloomberg) — Emerging-market bonds, with returns four times those of U.S. corporate debt, are extending their lead on signs that developing nations are growing faster than the world’s biggest economies.

Debt issued by emerging-market borrowers returned 11.3 percent this year through April 6, outpacing the 2.79 percent gains of U.S. company bonds, according to Bank of America Merrill Lynch index data. Petroleos de Venezuela SA. the state oil producer known as PDVSA, returned 6.64 percent this month, driving emerging-market debt’s 0.09 percent gain, compared with a 0.39 percent loss for U.S. corporate bonds.

The International Monetary Fund forecasts developing economies will expand 6 percent this year, almost three times more than advanced nations. While the European Union tries to contain Greece’s budget deficit. the U.S. government is issuing record amounts of debt to help it recover from the worst financial crisis since the 1930s.

“The blowout of developed countries’ fiscal deficits has caused people to re-assess emerging markets as an asset class,” said Brett Diment. the head of emerging-market debt in London at Aberdeen Asset Management Plc. “The days when they were seen as a risky bet are gone.”

JPMorgan Chase & Co. boosted its forecast for money flowing into emerging-market funds to between $40 billion and $45 billion this year, from a range of $30 billion to $35 billion, analysts led by Joyce Chang in New York wrote in a report last month.

Emerging Attractions

Emerging markets are attracting investors seeking higher yields as developed nations take longer to recover, and central banks keep benchmark interest rates at record lows, said Werner Gey Van Pittius. emerging-markets money manager at Investec Asset Management in London.

Elsewhere in credit markets, the extra yield investors demand to own corporate bonds rather than government debt rose 1 basis point yesterday from the lowest since November 2007, to 147 basis points, Bank of America’s Global Broad Market Corporate Index shows. The average yield fell to 4.027 percent.

The 12-month global default rate for high-yield debt fell to 9.9 percent in the first quarter, from 13 percent at the end of 2009, according to Moody’s Investors Service.

The rate will drop to 2.8 percent by year-end, then decline to 2.4 percent by April 2011, New York-based Moody’s said in a report yesterday. The U.S. rate is expected to end the year at 3.1 percent. Based on dollar volume, 11.3 percent of U.S. speculative-grade bonds were in default in the first quarter, down from 16.6 percent in the previous quarter, the ratings company said.

Leveraged Loan Defaults

U.S. leveraged-loan defaults were 10.3 percent, down from 11.9 percent in the prior three months, according to Moody’s. High-yield debt is rated below Baa3 by Moody’s and lower than BBB- by Standard & Poor’s.

Delinquencies on commercial mortgages bundled and sold as bonds may top 10 percent this year, Deutsche Bank AG said.

The delinquency rate for loans backing commercial mortgage-backed securities more than tripled to 6.74 percent in March from 1.91 percent a year earlier, Deutsche Bank analysts Richard Parkus and Harris Trifon wrote in a report. With delinquencies rising 0.75 percentage point last month, the rate shows little sign of slowing as loan servicers struggle with a growing pipeline of troubled debt, the New York-based analysts said.

Lorillard Bonds

Lorillard Inc.. the third-largest U.S. tobacco company, sold $1 billion of bonds. It issued $750 million of 10-year notes that yield 300 basis points more than similar-maturity Treasuries and $250 million of 30-year bonds paying a spread of 340 basis points, according to data compiled by Bloomberg.

The company issued the bonds through its Lorillard Tobacco Co. unit. The Greensboro, North Carolina-based maker of Newport cigarettes last sold debt on June 18, issuing $750 million of 8.125 percent 10-year notes at par, or a spread of 428.9 basis points, Bloomberg data show.

FirstMac Ltd. an Australian non-bank lender, will seek to refinance A$340 million ($315 million) of mortgage-backed securities, said Chief Financial Officer James Austin. Brisbane-based FirstMac wants to replace debt sold in 2006.

Also in Australia, Westpac Banking Corp. the country’s second-biggest lender, is seeking to sell bonds due in April 2013, it said in an e-mailed statement.

Greece Swaps Record

Credit-default swaps linked to Greek debt rose to a record after the government increased its estimate for the size of the 2009 budget deficit, the largest in the European Union. That pushed the cost of default insurance on Greece’s debt higher than that for Iceland for the first time.

Swaps tied to Greece jumped 31.5 basis points to a record 445 basis points, while those on Iceland rose 12 basis points to 413.5 basis points, according to CMA DataVision prices at 11:26 a.m. in New York. Contacts linked to Greece closed at 425 basis points on Feb. 4, the most ever.

The extra yield, or spread, between Greek 10-year bonds and benchmark German bunds widened to 442 basis points, the most since the introduction of the euro in 1999, before paring its gain to 425 basis points, Bloomberg generic data show. The spread has pared its gain, falling to 425 basis points.

The Markit iTraxx Europe Index of credit-default swaps on 125 investment-grade companies declined 1.7 basis points to 81.7 basis points, Markit prices show. The index typically increases as investor confidence deteriorates and falls as it improves.

Greek Finance Minister George Papaconstantinou said yesterday the nation’s 2009 budget shortfall will be at least 12.9 percent of gross domestic product, up from the previous estimate of 12.7 percent and more than four times the 3 percent limit for euro-region countries.

Fundraising Requirement

Greece is looking to raise about 11.6 billion euros ($15.5 billion) by the end of May and about 32 billion euros by yearend. Iceland required a $4.6 billion bailout led by the IMF after its three biggest banks collapsed in October 2008, leaving creditors wondering how they would recoup about $80 billion in debt.

Greece may default on its debt as soon as this year without “extraordinary” financial assistance from the EU and IMF, said Stephen Jen. managing director at BlueGold Capital Management LLP in London.

In New York, the Markit CDX North America Investment Grade Index Series 14 fell 0.68 basis points to 86.7 basis points at 12:27 p.m. in New York, according to Markit Group Ltd.

Credit swaps pay the difference between the value of defaulted debt and its face value should the borrower fail to meet its obligations. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Faster Recovery

Emerging-market bonds are rallying in the longer term as their economies accelerate after growing 2.1 percent in 2009. Advanced nations will rebound to 2.1 percent growth after contracting 3.2 percent last year, according to IMF forecasts.

“Most investors now share the view that emerging markets will be the driver of global growth over the medium term,” said Nick Darrant. who runs the emerging-market syndicate at Credit Agricole CIB in London. “The concept of flight to quality has been fundamentally undermined by the enduring strength of emerging markets. We are witnessing a paradigm shift.”

PDVSA, based in Caracas, led Bank of America Merrill Lynch’s emerging-market index of top 50 issuers, index data show. The company’s 5.5 percent bonds due in 2037 were priced at 51 cents on the dollar to yield 697 basis points more than benchmark rates, index data show.

‘Likely to Outperform’

“Investors will continue to search the globe for attractive fixed-income assets” as the economic outlook in most developed countries remains “subdued,” Mark Kiesel. global head of corporate bond portfolio management at Pacific Investment Management Co. wrote in a March 24 report. “High-quality credit assets are likely to outperform lower-quality alternatives, which will become increasingly vulnerable to subpar economic growth in developed economies,” he wrote.

In the U.S. President Barack Obama has increased U.S. marketable debt to an unprecedented $7.41 trillion to fund a budget deficit the government predicts will swell to a record $1.6 trillion in the fiscal year ending Sept. 30.

Developed economies face “headwinds” stemming from a collapsed housing bubble, substantial household debt and sovereign deficits and budgetary concerns that are “much more severe and more serious than in most emerging markets,” said Torsten Slok. senior economist at Deutsche Bank in New York.

Emerging-market corporate bond defaults may fall “sharply” to 1.8 percent this year, according to the JPMorgan analysts.

“Emerging-market countries are now on a much stronger footing relative to developed countries and we are very optimistic on returns,” said Investec’s Van Pittius. “The risk of a currency crisis and sovereign default in most emerging markets is pretty low at the moment.”

To contact the editors responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net ; Alan Goldstein at agoldstein5@bloomberg.net