U.S. fund buys Serbian T-bonds

As they flee the euro-zone debt crisis, a growing number of large global bond funds are diving into the shallow debt markets of small countries like Serbia, Wall Street Journal writes.

Eaton Vance Corp.'s $7.7 billion Global Macro Absolute Return Fund has snapped up 12% of the Balkan nation's treasury-bond market, making Serbia the fund's third-largest investment after the U.S. and China this year.

The billion-dollar funds dwarf local banks and investors who also purchase the debt, giving them outsize stature in these fringe markets. With no end in sight to euro-zone turbulence, fund managers are shunning bonds of Spain, Italy and even France in favor of small countries with less debt and improving growth prospects, WSJ reports.

Boston-based Eaton Vance has plowed over $450 million into Serbian dinar-denominated treasury bills and bonds, representing 6% of the Global Macro fund.

- In Serbia, we have very high real interest rates and a country that is reforming to become a more standard European country - says Mr. Cirami, a portfolio manager at Eaton Vance.

Serbia, which has surged economically since the end of its bitter wars with other former Yugoslav nations a decade ago, boasts a debt-to-gross domestic product ratio of 51%, well below Western European averages. And its treasury bonds yield in excess of 10% after adjusting for inflation, WSJ writes.

That compares with the 2.66% yield of the Barclays Global Treasury Universal index, a composite of treasury markets across the world with heavier weightings for larger countries. The index includes France and Spain but not Serbia.

Dusan Nikezic, the state secretary of Serbia's finance ministry, says the government has actively sought out foreign investors through roadshows and visits since opening the bond market to them in 2010.

At the same time, the Serbian government keeps tabs on who are the biggest investors in its $3.7 billion treasury-bond market. But Mr. Nikezic doesn't see Eaton Vance's large stake as a risk to its borrowing ability because if the fund manager sold out, "we have demand from other investors."

Foreign investors, mostly from the U.S., own about 40% of Serbia's domestic bonds, attracted by the country's slim debt profile and its high interest rates, WSJ cites Nikezic as saying.