Selcuk Gokoluk
Developing-nation borrowers are rushing to sell debt, taking advantage of increased appetite for new bonds to lock in costs as traders continue to flip flop over when the Federal Reserve will begin lowering interest rates.
Mexico was first off the block, kicking off the year with its largest ever bond sale. Hungary, Slovenia, Indonesia and Poland quickly followed. In just four days, emerging-market governments and companies closed 20 deals worth $24.4 billion, the busiest start to a year on record for dollar- and euro-denominated debt issuance out of developing nations, according to data compiled by Bloomberg.
The rush this early in the year underscores a belief that interest rates are as low as they can get for some time to come, especially after a fourth-quarter bond rally shaved the average emerging-market yield by about 150 basis points. Borrowers aren’t waiting for the Fed to start easing — much of its effects may already be priced in — as risks from worsening conflict in the Middle East, China’s economic stagnation and upcoming high-stake elections pile up.
“We can’t foretell what will happen in the next few months or the remainder of the year,” Hungary’s Finance Minister Mihaly Varga said in Budapest after the country sold $500 million more of bonds than it was expected to issue. “We decided to raise the amount because we had the opportunity to do so in the favorable yield environment.”
The momentum may continue, with a pipeline that includes Philippines and Kenya, as investors look to add emerging-market debt to their portfolios. Global EM debt funds have attracted $494 million in net inflows in the past two weeks, seeing money come in after more than five straight months of outflows, Bank of America Corp. said citing EPFR Global data.
Issuance has so far been restricted to investment-grade sovereigns, which could see challenges raising money later in the year as markets are discovering that their optimism over Fed rate cuts may have gone too far.
“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.
Hunt for Yield
Emerging market bonds posted losses last week as global assets largely retreated after a stellar year-end rally, taking the average dollar yield closer to 8%. That’s only made them more attractive to global debt buyers, who continue to hunt for yield at a time when the 10-year US rate has fallen back to the 4% area. They also offer better returns than EM local-currency bonds, which on average, give less than a percentage point over Treasuries.
“Yields look attractive,” said Philip Fielding, a money manager at MacKay Shields, a unit of New York Life Insurance Co. that has $130 billion under management. “It makes sense to be selective but remain invested.”
SB Asset Management’s head of fixed income, Kasparas Subacius, echoes the view. The asset manager bought 10-year Poland bonds on Thursday.
“We see euro-denominated Polish bonds as attractively priced given that new government coalition is pro-European Union and chances of unlocking frozen EU funds have risen substantially,” said Subacius.
One-Sided Market
The issuance euphoria is not seen benefiting high-yield borrowers, which could face an even harder year as the average yield on such debt remains above 10%, according to a Bloomberg index, making it prohibitively expensive for most borrowers.
“I don’t think you’re going to see a banner year in supply,” said Samy Muaddi, head of emerging-market debt sovereign debt at T Rowe Price in Baltimore. “It will probably be front-loaded, driven by investment grade and we’re going to need probably the first Fed cut for a lower 10-year Treasury to get a reprieve for high yield.”
Meanwhile, the debt crisis lingers. Ethiopia became the latest sovereign to miss payment late last year, and long-running negotiations on restructuring bonds of Ghana, Sri Lanka and Zambia remain inconclusive.
All told, the deal flow this year highlights strong investor appetite for duration and solid price leverage for borrowers, said Stefan Weiler, the head of debt capital markets for central and eastern Europe, the Middle East and Africa at JPMorgan Chase & Co.
“To sustain the primary-market momentum, it will be important for deals to perform in the after-market and also for new economic data releases to not unsettle the general market consensus around expected US rate cuts this year,” he said.
