Wednesday, August 17, 2022

Emerging market borrowers are selling debt at near record rates

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This article is part of the FT’s Runaway Markets series.

When Saudi Arabia announced it would sell $ 5 billion in international bonds this week, investors rushed for a piece of the action.

The Gulf nation has attracted around $ 20 billion in orders for its 12- and 40-year bonds, which has helped it reduce the borrowing costs it paid on debt, sources close to the folder.

Saudi Arabia’s feat is just the latest in a string of successes for emerging market borrowers, who have rushed this year to exploit international financial markets in an attempt to lock in low interest rates.

Governments and businesses in developing countries sold $ 112.57 billion in international bonds in the first 26 days of 2021, just below the monthly record of $ 112.78 billion set last January, according to the reports. Bond Radar data going back to 2003. The last three days of the month are expected to tip the final tally above the threshold, analysts said.

“For all intents and purposes, this is a tsunami we are facing right now,” said Sergey Goncharov, Emerging Markets Portfolio Manager at Vontobel Asset Management.

Two factors fueled January’s bond rush, bankers and investors said. First, cash-strapped governments have had to increase their borrowing as the coronavirus crisis has strained public finances.

Second, a first year sale the US Treasury market, which propelled 10-year benchmark yields to their highest level in about ten months, reminded us that the era of lowest bond yields in developed countries – which drove investors in emerging countries returns – may not last forever.

“From a borrower’s perspective, now is the perfect time to lock in rates before yields rise,” said Stefan Weiler, head of debt capital markets for Central and Eastern Europe, the Middle East and Africa at JPMorgan. “It’s hard to imagine the market improving. We’ve probably seen the lowest rates, and many spreads are close to historic lows. “

Saudi Arabia sold its 12-year bond for a yield 1.3 percentage points higher than the 10-year US government debt. The 40-year-old issue was valued at a yield of 3.45 percent. The country joins borrowers like Mexico, Colombia and Indonesia to issue large chunks of new debt in the first weeks of 2021.

Many of his fellow Middle Eastern governments have followed suit – including lower-rated issuers like Oman and Bahrain, both of which have sold 30-year debt.

Billion dollar column chart showing investors in emerging market funds

“Some of these Middle Eastern borrowers have suffered the double blow of Covid and the price of oil, so they are responsible for a lot of the increase in emissions this year,” said Anthony Kettle, manager. senior portfolio manager at BlueBay Asset Management.

According to Andrea DiCenso, portfolio manager at Loomis Sayles, investors rushed to acquire the new offering. EPFR data shows investors invested $ 4.3 billion in funds that invest in emerging market bonds for the week ending January 20, the largest sum in nearly two years and the 16th consecutive week of collection. That brought the total for the first three weeks of 2021 to around $ 9 billion.

The clamor from investors underscores their confidence that the recent Treasury liquidation will not turn into a repeat of the “taper tantrum” of 2013, when a spike in US bonds hit emerging market bonds.

Fugitive markets

In a series of articles, the FT examines the exuberant start of 2021 in global financial markets

Fears of a redux percolated earlier this year when a handful of regional Fed chairmen signaled the possibility that the US central bank could start withdrawing support from financial markets as early as this year. Most market participants assumed the Fed would suspend cutting its asset purchase program by $ 120 billion per month until at least 2022.

Senior Fed officials – including President Jay Powell – have since gone to great lengths to tamp speculation of an earlier-than-expected pullback, but some investors fear the problem will recur, especially as the economic recovery accelerates.

“It’s not hard to see that with the rollout of vaccines, we will unambiguously see stronger growth in the future,” said James Barrineau, head of global emerging debt strategy at Schroders. “You put that together with where the returns are, with supply being incredibly abundant and the Fed may respond to stronger growth by hinting that it may decline towards the end of this year, and all of this gives issuers some urgency to do their business.

What’s remarkable about the recent wave of bond sales, according to Barrineau, is that many countries have sought to sell longer-term bonds. Beyond selling 40-year bonds from Saudi Arabia, Mexico and Indonesia have switched to 50-year notes, while Chile has joined with its Middle Eastern counterparts in selling 30-year debt.

“The incentives have to go as long as possible into maturity,” he said. “It is better to touch [the market] every now and then, don’t worry about having to refinance at any point in your life. “

However, the record pace could slow down as the year progresses and global economies begin to recover, Moody’s analysts predict. While they still forecast robust issuance in 2021, they forecast volumes to be lower than the all-time high of $ 639 billion from emerging market borrowers raised in international markets last year.

Emerging markets break records in 2020

Vaccination delays and longer lockdowns that are slowing economic recovery could also dampen activity and reduce demand for riskier assets, investors warn.

“Countries realize that they meet their financing needs best when the skies are blue because you never know what to expect,” said Alejo Czerwonko, investment director for Latin America at UBS Wealth Management.

Additional reporting by Nikou Asgari


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