Emerging Markets Step Up Bond Sales—Before It's Too Late
Traders are being lured back into battered developing-nation bonds by more compelling valuations.
(Bloomberg) -- Investors’ new-found appetite for risk is prompting an unexpected rush of emerging-market bond sales amid speculation the window of opportunity won’t stay open for long.
Led by Saudi Arabia, governments in developing countries raised $19 billion in the first three weeks of the year, according to data compiled by Bloomberg. The volume is below last year’s comparable figure, but it is more than many investors and bankers expected given the selloff in emerging-market assets last year that caused spreads to widen to the highest level since 2016.
Traders are being lured back into battered developing-nation bonds by more compelling valuations, expectations the Federal Reserve will pause its monetary tightening and hopes that the U.S. and China will reach a trade deal. But the outlook for the market is far from certain. Concern is now mounting about global growth, with the International Monetary Fund cutting its forecast for the world’s economic expansion to the weakest in three years.
“It’s been a good start to the year and probably better than most had expected,” said Stefan Weiler, head of debt capital markets for central and eastern Europe, the Middle East and Africa at JPMorgan Chase & Co., the biggest arranger of deals from the area according to Bloomberg league tables. “The lesson learned from the last year: take your window when it opens up and be nimble on timing.”
Saudi Arabia priced a $7.5 billion deal in the second week of the year, while its first deal in 2018 came in April. Uruguay and the Philippines have also advanced debt sales compared with last year, while Mexico seized the sales rush to test investors sentiment toward the new administration of President Andres Manuel Lopez Obrador
Colombia returned to the global bond market Wednesday -- the first test of investor appetite for the nation’s debt since congress blocked the government’s tax raising plans last year. The investment-grade nation is selling more of its dollar bond due 2029, and will also offer debt due 2049, according to regulatory filings.
The iShares JPMorgan USD Emerging Markets Bond exchange-traded fund climbed for a sixth day in its longest winning streak since January 2018. The ETF has climbed 3.1 percent so far this year, joining a rally in risk assets.
Narrowing Spreads
Investor appetite for risk has brought some relief to borrowing costs. The average spread on emerging-market sovereign external bonds has fallen to 370 basis points from about 420 basis points at the start of the year. Still, the spread remains higher than the 260 basis points seen at the beginning of 2018, before markets were roiled by rising U.S. rates, trade tensions with China and global political instability.
Sovereign sales are still 43 percent down from the same period of 2018, which had the busiest start to a year on record, according to data compiled by Bloomberg. The figures were bloated by Argentina, which priced a jumbo deal of $9 billion and is now absent from the market following a record bailout from the IMF. Oman, which raised $6.5 billion last January and plans to sell $6.2 billion through foreign and domestic debt this year has yet to come to the market.
“The market has opened the year much stronger than anyone had envisaged and the street was caught a bit short initially so that paves the way for new supply,” said Anders Faergemann, a fund manager at PineBridge Investments in London which oversees $90 billion in assets. “There are more new issues in the pipeline and we expect a variety of names to come -- both frequent issuers and some more opportunistic.”
Morgan Stanley recently upgraded its call for emerging-market sovereign debt, saying cheap valuations offer room for a “bullish return” forecast for this year. For money managers at NN Investment Partners, that return could be of 5 to 10 percent and even higher in the case of frontier debt.
Developing nations should seize the opportunity as it may not last long, said Chris Diaz, a money manager at Janus Capital Management in Denver.
“I think this is an attractive window for emerging-market issuers,” said Diaz, who expects spreads to widen this year as global growth slows. “This idea of a ‘Fed pause’ has reignited risk markets, but we are more skeptical. Global growth continues to decelerate and the U.S. first quarter GDP could be eye popping bad.”
To contact the reporters on this story: Lyubov Pronina in Brussels at lpronina@bloomberg.net;Aline Oyamada in Sao Paulo at aoyamada3@bloomberg.net
To contact the editors responsible for this story: Hannah Benjamin at hbenjamin1@bloomberg.net, ;Rita Nazareth at rnazareth@bloomberg.net, Philip Sanders
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