Emerging market borrowers sold over $ 260 billion worth of bonds in the first half of 2014, outstripping year-ago levels despite geopolitical noise as borrowers rushed to take advantage of lower-than-expected US yields.
The hard currency debt market was hampered by the Ukraine-Russia conflict and a sharp fall in Russian bond sales. But a 50-basis-point fall in US 10-year yields, the benchmark for most emerging debt, has more than made up for the geo-political risks.
As a result, issuance has been robust, with analysts noting that governments and companies have already completed two-thirds of full-year forecast issuance.
By Friday, year-to-date bond sales were $ 268 billion, with governments accounting for $ 67 billion and companies raising the rest, according to data from Thomson Reuters. That compares with year-ago issuance of $ 240 billion, of which governments had sold $ 50 billion, the data shows.
“Issuance has been very strong and that reflects two things. First, you have a strong underpinning of the market in terms of demand because of investors’ search for yield,” said David Hauner, Head of EEMEA fixed income and economics at Bank of America Merrill Lynch.
“Second, we have seen a front-loading of issuance because of the consensus view that US interest rates will rise.”
US yields, contrary to forecasts, have fallen this year to 2.5% from end-2013 levels of 3% because of relatively weak US data and a dovish Federal Reserve.
But the Fed is expected to start raising rates in the second half of 2015, prodding bond sellers to rush to market before borrowing costs rise.
BofA/Merrill estimates year-to-date bond sales at $ 258 billion while JPMorgan sees sovereign year-to-date issuance at over $ 60 billion or two-thirds of full-year forecast levels. Corporates have sold over $ 200 billion, JPM said.
Issuance figures often differ because of the way each compiler defines emerging markets.
Despite the hefty issuance, emerging hard currency debt has been one of the top performing asset classes of 2014, with sovereign bonds returning over 9%.
But most banks predict Treasury yields will rise back to around 3% by year-end or even higher, raising borrowing costs globally, as the Fed winds down money-printing and signs of economic recovery gather pace.
Another headwind could come from Argentina which could go into technical default because of a long-running court case.
“The largest part of the rally is likely behind us,” Hauner said.
Russia, frontiers, Euro
Russian companies are generally prolific bond issuers but conflict in Ukraine and the threat of Western sanctions in retaliation for Moscow annexing Crimea has effectively shut them out of the market since end-February.
Russian bond sales total just $ 7 billion this year, Thomson Reuters data shows, after over $ 25 billion in the first half of 2013. But with around $ 150 billion in debt repayments due in 2014, companies have started returning to the market, with state-run Sberbank and Gazprombank selling bonds last week.
David Spegel, head of hard currency emerging debt at BNP Paribas, said just $ 13 billion had been issued by CIS ex-Soviet borrowers and estimated that the market closure had resulted in $ 43 billion fewer new deals from the CIS.
“This shows the impact of the political crisis on the ability of CIS names to originate debt in global capital markets,” said Spegel.
Russian borrowers, like many emerging peers, have been turning to euro debt markets, where borrowing costs have been pushed down by European Central Bank policy easing. Demand is also strong from European funds, as the surge in yields for weaker euro borrowers such as Spain and Portugal retreats.
Emerging issuers borrowed 42.1 billion euros ($ 57.4 billion) or 21% of the total compared with 40 billion euros in the whole of 2013.
The hunt for yield has also allowed lower-rated emerging credits to tap markets. That includes serial defaulter Ecuador which managed to raise $ 2 billion in June, and Pakistan, Sri Lanka and Kenya.
While these high-yielding deals were heavily subscribed, Spegel noted that overall only 26% of this year’s issuance was junk-rated compared to a historic 33% norm.
“This highlights the fact that although investors are hungry for EM risk exposure, their speculative appetite is not as robust,” he added.