James Mackintosh 

Investors trying to assess the dangers of a resurgent emerging-market crisis or the return of troubles in the eurozone should be looking to one of the markets not directly manipulated by central bankers: dollar bonds issued by countries other than the U.S.

Yields on these bonds suggest investors think that Russia, one of the biggest emerging markets, is now less risky than Portugal, the next potential point of failure in the eurozone after Greece. Just over a year ago, Russian dollar debt yielded more than twice as much as Portugal's.

Given Russia is an oil-dependent malcontent subject to Western sanctions, while Portugal is a member of the European Union, the eurozone and the Organization for Economic Cooperation and Development, this doesn't reflect well on financiers' faith in Europe fixing its problems.

Here is a simple explanation. Investors think highly indebted Portugal, with a socialist government, is more likely to default than Russia, which has little debt and has shown itself willing to pay. Portugal is rated as junk by all three of the main rating companies, while Russia has clung to its investment-grade status.

There is a deeper story, too, about central-bank influence on bond markets. When the European Central Bank said it would start buying bonds last year, local bond yields tumbled as prices rose. German yields aren't far above the lows they hit in April 2016, but bonds of the worst-off countries haven't done so well.

Spain, part of the troubled eurozone periphery, holds a second election next month, after operating with only an interim government since last year's inconclusive vote, and worries are swirling about the toxic combination of political populism and high debt levels, particularly in Greece.

But the ECB is buying bonds only issued in euros, not the handful of bonds eurozone countries have in other currencies. Most of the issuance is tiny compared with local markets, but Portugal decided two years ago to borrow big in dollars, selling a $4.5 billion dollar-denominated bond, maturing in 2024, that makes up more than 3% of its total bond debt.

This has created a neat test case for the effect of the ECB's policies.

As world markets hit turmoil earlier this year, investors sold the bonds of the weakest countries in the eurozone, and the gap, or spread, between their euro-denominated yields and safe German bunds -- the standard measure of their riskiness -- widened. Portugal was hit particularly hard, and its 10-year euro bonds now offer a premium of 2.8 percentage points above Germany's, against 2.2 points at the start of 2015, before Mario Draghi, the ECB's president, announced the bond-buying program.

That doesn't mean the ECB isn't helping: Yields would be even higher without it. The dollar bonds suggest Portugal has benefited from a reduction of its yield by at least 0.5 percentage point. As the central bank began quantitative easing, a persistent gap opened up between Portugal's dollar- and euro-denominated spreads relative to safe bonds, a differential that widened when the ECB expanded its buying in December.

The distortions of quantitative easing have left investors with few measures of risk not directly affected by central banks. During the eurozone crisis, investors closely monitored credit-default swaps, but that market hardly exists today. Portugal's dollar bonds aren't a perfect substitute as a risk measure. The market is thin for what has become something of an orphan asset. The bonds aren't a member of the benchmark Barclays Index, either.

"There's no natural buyer of that bond," says Iain Stealey, a portfolio manager at J.P. Morgan Asset Management.

Still, it is notable that the behavior of Portugal's euro-denominated bonds changed after QE began, while all the negatives that weighed on its dollar debt before the bond buying started remain in place today.

By contrast, there has been what Alan Higgins, chief investment officer of the private bank Coutts, says is a mania for Russian bonds. Fear that the West's sanctions could prompt retaliation or economic collapse has faded. Russia, which makes up 6.6% of the Barclays EM Sovereign Index, has benefited as investors have rushed back into emerging markets after fleeing last year. The recent rise in oil prices has helped, too.

Many foreigners confuse Portuguese and Russian accents. With Russian dollar bond yields now higher than Portugal's, don't be confused about the message from the market: Concerns about the weakest members of the eurozone have picked up again, even as emerging-market worries recede. Long-term investors who have faith that Europe can sort itself out can make extra yield by buying Portugal's dollar bonds. The rest of us should watch one of the few European risk measures not subject to central-bank manipulation.

Write to James Mackintosh at James.Mackintosh@wsj.com

(END) Dow Jones Newswires

May 30, 2016 13:40 ET (17:40 GMT)