Emerging-market borrowers are piling back into global bond markets, selling about $20 billion in dollar notes in just a few days, all too aware that the window of opportunity may snap shut as suddenly as it opened.
Countries from Colombia to Indonesia and developing-nation companies rushed to lock in lower borrowing costs, taking advantage of a respite in conditions amid signals the Federal Reserve may be close to winding up its aggressive interest rate hikes. That, combined with cooling jobs growth in the world’s largest economy, helped bring down US Treasury yields from a 16-year high, allowing a swath of deals that have been on pause to come to market.
And with several sales — including Brazil’s long-awaited debut in ESG markets — still in the pipeline, this flurry of activity may be just the start of a new wave of issuance for developing-nation borrowers.
“It’s very good news for issuers and it’s very good news for portfolio managers,” said Jean-Charles Sambor, head of emerging markets fixed income at BNP Paribas Asset Management. “The bottom line is that it will alleviate the chances of additional outflows from emerging markets or potential rise in default because I think this market’s reopening should be positive for a very active primary pipeline going ahead.”
Governments like Costa Rica, Indonesia and Bulgaria and companies including Colombia’s Grupo Energia Bogota and Korea National Oil Corp all issued hard-currency bonds the week ended Nov. 10, bringing the number of borrowers jumping at the opportunity to more than 30. Spearheaded by Colombia and Turkey — each of which sold $2.5 billion of dollar debt — the total deal size reached about $20 billion, the biggest for any week this year since February, according to data compiled by Bloomberg.
US yields are posting the biggest drop since March, giving a boost to emerging-market assets — stocks are on track for their first month of gains since July, while currencies are up less than 0.1%, giving up some of the earlier advances as investors continue to flip-flop on whether the Fed is done hiking. The improved mood prompted more issuers to come to market — and not just in developing nations. The US junk bond primary market has also been inundated with new supply after a slow October.
“There was a lot in the pipeline, as the relentless move higher in core rates subdued the primary market for quite some time,” said Philip Fielding, co-head of emerging markets at Mackay Shields UK. “Then, as the US 10-year yields moved from 5% in mid-October to around 4.5% in early November, the floodgates opened.”
Strong Demand
Due to a long period of suppressed risk appetite, investors are now holding extra cash from sources like coupons and amortizations they’re looking to put to good use, according to Thys Louw, portfolio manager at asset manager Ninety One.
“With such large net negative issuance, even outflows from the asset class, cash balances are quite high,” said Louw. “Investors have the capacity for now to absorb any issuance.”
In the case of Colombia, its $2.5 billion sale of its first ethically-labeled bonds garnered a whopping $11 billion of orders, over four times the deal size. Turkey also tapped the dollar market this past week for the first time since April and sold $2.5 billion of a five-year Islamic notes at a yield of 8.5%. Excluding interest from the deal’s lead managers, book size was above $6.5 billion.
Demand for longer-dated bonds also increased compared to the previous quarter, signaling that investors are now more confident that the Fed is done hiking and that it’s safer to get into duration now than before, Louw added.
More in Pipeline
A number of deals are still in the pipeline, including Brazil’s much-anticipated sale of environmental and socially responsible bonds, which had been delayed several times, partly due to persistently high bond yields.
“We have a couple of issuers, state-owned companies and other frequent issuers that are getting ready for early 2024,” said Alejandro Gordano, capital markets partner at Shearman & Sterling who led Uruguay’s $700 million deal tapping the existing 2034 sustainability-linked bonds on Nov. 6.
The Philippines was planning to offer $1 billion of sukuk bonds in late November and a euro bond sale next year, Finance Secretary Benjamin Diokno said last month. Thailand also said in September that a dollar bond sale was still on the table.
Even smaller and frontier markets could potentially issue if improvement in US Treasury rates continues — a “game changer” for riskier credits that have been facing difficulties tapping the international market, according to BNP’s Sambor.
“The window for issuers ahead of the year-end is wide open,” said Rajeev De Mello, a global macro portfolio manager at GAMA Asset Management. “For those with maturities in the next 12 months, it is better to lock in attractive spreads and capture investor demand now.”
What to Watch
- Brazil’s September economic activity is expected to recover from a drop in August, while Chile’s central bank is expected to publish minutes from its last meeting
- Argentina releases inflation data just days before a runoff presidential election that’s pitted Economy Minister Sergio Massa against libertarian outsider Javier Milei
- The People’s Bank of China is forecast to pull the trigger on rate cuts that economists surveyed by Bloomberg have been expecting for months. Growth is likely to slow in output and fixed-asset investment
- India will report CPI data and trade balance while South Korea will publish its unemployment rate
- Poland’s GDP data will show that the economy bounced back last quarter, with domestic demand likely be the dominant driver of the recovery
- Nigeria’s inflation is expected to have continued to tick up, with a 2.8% monthly increase, a faster pace than September’s 2.1%
--With assistance from Karl Lester M. Yap and Esteban Duarte.
