Investors in emerging market bonds this week began looking for higher returns by taking the extra risk of buying global bonds issued in local currency.

"Investors are ready to buy this kind of bond because there is not a lot of value out there in the rest of the market," said Christian Stracke, lead emerging markets analyst at CreditSights, a Wall Street research firm."External debt spreads are so tight now that people are looking for value."

In Latin America, among the Andean countries, Colombia is the first to bet on its local currency by launching a 6-year $375 million global bond issued in pesos but which will be repaid in dollars.

This new deal, launched on Tuesday, received twice as many bids as expected, and is the result of the dollar's weakness and an improvement in Colombia's macro-economic policies, analysts say.

Colombia's peso has risen 14.2 percent against the dollar over the last 12 months to 2,535 per dollar on Wednesday. The government expects it to rise by 3 percent against the dollar next year.

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"The biggest 'positive' of this bond is that Colombia's peso is undervalued in real terms relative to historic averages," Stracke said. "People are looking for value, and right now some of the only things in emerging markets that offer any value are currencies."

International fund managers are eager to get in on the currency rally and buy Colombian Treasury paper (TES), but tax treatment of foreign investors in Colombia is not as friendly as in other emerging markets such as Mexico, where foreign investors do not have to pay withholding tax.

However, by investing in Colombia's peso-denominated global bond, bond holders do not have to register with the banking regulator or pay withholding tax or financial tax that would oblige them to pay up to a third of their returns to the Colombian government.

"This new bond is a global bond. Although it is denominated in pesos, it is as if it were an external bond because it is governed by New York law, and the way it is interpreted, the investor that buys it is not subjected to any of these local requirements," said Fernando Losada, emerging markets research director at ABN AMRO in New York.

(From Reuters, November 10, 2004)

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