Bond sales reached a record pace as emerging markets face a year of risks ahead

Mexico was the first out of the starting blocks and started the year with the largest bond sale ever. Hungary, Slovenia, Indonesia and Poland soon followed. In just four days, emerging market governments and companies closed 20 deals worth $24.4 billion, the busiest start to a year ever for developing country dollar- and euro-denominated debt issuance, data compiled by Bloomberg showed.

The rush so early in the year underlines the belief that rates will remain at their lowest possible levels for a while, especially after a fourth-quarter bond rally shaved about 150 basis points off average emerging market yields. Borrowers are not waiting for the Fed to start easing – many of its effects may already be priced in – as risks of worsening conflict in the Middle East, economic stagnation in China and the upcoming high-stakes elections pile up.

“We cannot predict what will happen in the coming months or the rest of the year,” Hungarian Finance Minister Mihaly Varga said in Budapest after the country sold $500 million more in bonds than expected. to give. “We decided to increase the amount because we had the opportunity to do so in the favorable yield environment.”

The momentum could continue, with a pipeline also including the Philippines and Kenya, as investors look to add emerging market bonds to their portfolios. Global emerging market debt funds attracted $494 million in net inflows over the past two weeks, with money coming in after more than five straight months of outflows, Bank of America Corp. said, citing EPFR Global data.

Issuance so far has been limited to investment-grade Treasuries, which could face difficulty raising money later this year as markets discover that their optimism about Fed rate cuts may have gone too far.

“Current market sentiment is still positive and issuers are keen to take advantage of this opportunity and secure their financing,” said Sergey Dergachev, head of emerging markets corporate bonds at Union Investment Privatfonds GmbH in Frankfurt.

On the hunt for returns

Emerging market bonds posted losses last week as global assets largely retreated after a stellar year-end rally, pushing average dollar yields closer to 8%. That has only made them more attractive to global bond buyers, who continue to hunt for yield at a time when US 10-year yields have fallen back towards 4%. They also offer better returns than local currency emerging market bonds, which on average yield less than a percentage point versus government bonds.

“The returns look attractive,” said Philip Fielding, money manager at MacKay Shields, a unit of New York Life Insurance Co. which has $130 billion under management. “It makes sense to be selective, but still remain invested.”

Kasparas Subacius, head of SB Asset Management's fixed income department, agrees with this view. The asset manager bought ten-year Polish government bonds on Thursday.

“We view euro-denominated Polish bonds as attractively priced, given that the new governing coalition is pro-European Union and the chances of freeing frozen EU funds have increased substantially,” Subacius said.

One-sided market

The issuance euphoria is not expected to benefit high-yield borrowers, who face an even tougher year as the average yield on such bonds remains above 10%, according to a Bloomberg index, making it unaffordable for most borrowers .

“I don't think you're going to see a peak year in terms of supply,” said Samy Muaddi, head of emerging markets government bonds at T Rowe Price in Baltimore. “It will likely get a boost driven by investment grade, and we will likely need the first Fed cut on a lower 10-year Treasury to get a reprieve on high yield.”

Meanwhile, the debt crisis continues. Ethiopia became the latest state to miss the payment late last year, and long-running negotiations over the restructuring of Ghana, Sri Lanka and Zambia's bonds are still inconclusive.

Overall, this year's deal flow indicates strong investor appetite for duration and solid price leverage for borrowers, said Stefan Weiler, head of debt capital markets for Central and Eastern Europe, the Middle East and Africa at JPMorgan Chase & Co .

“To maintain momentum in the primary market, it will be important that deals perform well in the aftermarket and that new economic data does not disrupt the general market consensus on expected US rate cuts this year,” he said.

First print: January 7, 2024 | 8:55 PM IST