Developing-nation borrowers are on a rally to sell debt amid increased appetite for new bonds, as investors weigh in on fluctuating expectations of the U.S. Federal Reserve's timing to decrease interest rates.
Within four days, emerging-market governments and corporations closed 20 transactions totaling $24.4 billion. As per data compiled by Bloomberg, this marked the busiest start to a year on record for dollar- and euro-denominated debt issuance from developing nations.
Early year rush suggests the belief that interest rates are hitting their lows for some time, following a significant bond rally in Q4 2023 that lowered emerging-market yields by 150 basis points. Borrowers decided not to wait for the Fed to start easing rates act amid concerns about escalating conflicts in the Middle East, China's economic slowdown and upcoming elections.
Mexico started the rush with its largest-ever bond sale. Its Finance Ministry announced last Tuesday that it had placed $7.5 billion in sovereign bonds to support increased spending during this election year. This move positions Mexico as "the largest sovereign issuer with a BBB rating at a global level."
Hungary followed suit by selling more than $500 million than it had been expected to issue. Then, Slovenia raised €1.5 billion ($1.64 billion) through ten-year government bond sales to institutional investors. Meanwhile, Indonesia raised over $2 billion as part of the growing Asia bond pipeline.
The latest on the run is Poland, marketing 10- and 20-year notes approximately 120 and 165 basis points above mid-swaps, according to a knowledgeable source. The urgency to sell may stem from the country's impending debt obligations of $4.6 billion in repayments and interest charges in January alone, marking its highest monthly debt due for the year.
Investors' interest in emerging-market debt might persist, with the inclusion of the Philippines and Kenya in the bond market pipeline. Bank of America Corp., citing EPFR Global data, reported that global EM debt funds had experienced a turnaround, receiving $494 million in net inflows in the past two weeks.
A rally for attractive bonds
This positive trend follows more than five consecutive months of outflows. Emerging market bonds witnessed declines last week, aligning with a broader global asset retreat following a robust year-end rally. As a result, the average dollar yield edged closer to eight percent.
However, this drop has heightened the allure of these bonds for global debt buyers, who are in pursuit of higher returns, particularly since the 10-year US rate has fallen to approximately four percent. These bonds also present more favorable yields compared to EM local-currency bonds, which typically offer less than a percentage point over Treasuries.
So far, issuance has primarily focused on investment-grade sovereigns. However, these could be hurdles in raising funds later in the year as markets realize their optimism regarding potential Fed rate cuts may have been excessive.
“The current market sentiment is still positive and issuers would like to take this opportunity and get their funding done,” said Sergey Dergachev, head of emerging-market corporate debt at Union Investment Privatfonds GmbH in Frankfurt, as quoted by Bloomberg.
In the broader eurozone, ING anticipates that governments will issue approximately €150 billion in debt solely in this month. This surge is driven by governments aiming to capitalize on the recent decline in yields, while investors actively seek fresh opportunities at the start of the new year. Factoring in redemptions, there is a net supply of €72 billion.
Societe Generale interest rates strategist Jorge Garayo notes that a similar amount of debt volume was issued in January last year. However, this year's issuance arrives following an impressive rally that appears to be approaching its conclusion.
This month, Germany plans to issue 10-year bonds, while Spain has already completed the sale of bonds with a 30-year maturity.
Eurozone bond yields, which move in contrast to bond prices, have begun 2024 on an upward trajectory after a sharp decline in November and December. Germany's 10-year yield, considered the benchmark for the eurozone, has increased to slightly above two percent from its recent low of 1.896 percent recorded last week.