By Libby George and Karin Strohecker
LONDON(Reuters) – Emerging market countries and companies have issued a flood of bonds topping $55 billion, the most in years, as borrowers rush to lock in cash before the potential tumult of the second Donald Trump administration in the United States.
Saudi Arabia sold a whopping $12 billion in bonds last week, Mexico $8.5 billion and Chile more than $3 billion, along with Slovenia, Hungary, Indonesia, Estonia and a string of companies.
Many of them were issued at zero premium over existing bonds, while euro-denominated debt was also back in vogue.
Morgan Stanley (NYSE:MS) calculations show a total of $55.5 billion in issuance year to date, the most in more than a decade, and well above last year’s $44.6 billion.
“Borrowers want to be at the front of that issuance wave,” said Stefan Weiler, head of CEEMEA debt capital markets at JPMorgan.
Weiler said borrowers were coming “en masse and in size” to issue roughly another $30 billion in debt sales ahead of Jan. 20, when Trump’s inauguration could spark volatility, and ahead of the U.S. Federal Reserve meeting at the end of the month, which could signal changes to its interest rates plans.
Trump’s aggressive promises to place additional tariffs on China threaten economies across a swathe of emerging countries – chiefly China but also commodity exporters like Chile and Brazil. His penchant for unpredictable policies also tends to rattle markets.
But nascent re-inflation fears in the United States – and blockbuster jobs growth – is adding fire to the bellies of those who need to raise money.
“There’s this re-inflation narrative that kind of spooks the market,” said Nick Eisinger, co-head of emerging markets fixed income with Vanguard.
“Overall risk-free yields therefore have to go up. And therefore the starting point in terms of countries wanting to do new issues gets more expensive.”
BULLDOZER ROLLS ON
Emerging market issuance last year was already like a “bulldozer,” according to BNP Paribas (OTC:BNPQY). Matt Doherty, head of CEEMEA syndicate at BNP Paribas, said this is continuing.
Those who needed cash were funding well in advance in 2024 to avoid the “slipstream” of U.S. election-induced volatility.
Now, with the market recalibrating from expectations of as many as five rate cuts from the U.S. Fed down to potentially just one, there was more reason to front-load issuance.
“I wouldn’t be surprised if you have another first half where we see the best part of $200 billion in issuance from CEEMEA,” Doherty said, referencing last year, when 70% of emerging market debt raised was in the first six months of the year.
“There isn’t really any reason for people to wait.”
Thus far, the average new-issue premium has also been between 0 to 10 basis points (bps), compared with 15 to 20 bps early last year. Several borrowers, including Chile, the Hong Kong Airport Authority and Hungary, paid 0-5 basis points, Doherty added.
But high yields compared with recent years prompted some sovereigns, such as Saudi or Indonesia, to opt for shorter-term bonds rather than their usual 30-year sales.
An unusually high number of issuers – including Chile, Indonesia and Hungary – also offered euro-denominated bonds to make use of lower yields in the bloc.
COVID DEBTS AND FEAR OF THE FED
Adding to funding needs are nearly $500 billion of redemptions in emerging markets due this year, according to Paribas data, as short-term debt issued in 2020 during the COVID-19 pandemic comes due.
Bank of America’s David Hauner said the COVID-era debt repayments meant that outside the Gulf countries, net issuance would be lower than last year. Total (EPA:TTEF) issuance for companies, corporates and other emerging market entities this year, he said, would be around $567 billion.
But as many as possible, he said, would issue early, due also to fears that the U.S. Fed could even hike rates again.
While that is not a Bank of America expectation, Hauner said it would be “very brutal for fixed income.”
“It’s the most dangerous scenario for EM credit,” he said.
Thus far, the market has easily absorbed the issuance. Deals are oversubscribed, and every issuer is raising the money they target.
But Citi, in a note, said risks are high – and the market could shift quickly.
“All the current support for EM credit is bound to be short-lived” Citi’s note said.