Emerging-Market Bond Sales Are Soaring Again as Investors Dive Back Into Risk

Emerging-market bond sales are roaring back from last month’s doldrums, as issuers from Brazil to Turkey take advantage of rebounding markets to raise fresh financing.Author of the article:You can save this article by registering for free here. Or sign-in if you have an account.(Bloomberg) — Emerging-market bond sales are roaring back from last month’s doldrums, as issuers from Brazil to Turkey take advantage of rebounding markets to raise fresh financing. Subscribe now to read the latest news in your city and across Canada.Subscribe now to read the latest news in your city and across Canada.Create an account or sign in to continue with your reading experience.Create an account or sign in to continue with your reading experience.Sales of dollar- and euro-denominated bonds from developing nations this month are already running some 200% above volumes seen last April, data compiled by Bloomberg shows. A total of $46 billion was raised through Friday, as governments and companies raced to capitalize on improved market sentiment amid hopes of a US-Iran peace deal. The revival follows a plunge in bond sales last month, when the war crimped appetite for riskier assets. Now though, with markets again humming with activity and stocks on the cusp of recouping pre-war losses, emerging markets are once again looking like a favorite investment for investors on the hunt for yield.Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againInterested in more newsletters? Browse here.“The EM bond market appears to have largely moved beyond the war risk for now,” said Laura Reardon, a portfolio manager of MFS Investment Management. “Deals that were in the pipeline ahead of the conflict and subsequently put on hold, are now coming to market, and investors have cash to deploy following the recent stabilization in markets.”Reardon noted emerging economies’ recent track record of resilience — they bounced back swiftly from crises such as the pandemic and the Ukraine war, for instance. While many countries were hit hard by oil’s surge last month, swathes of energy-producing nations in Africa and Latin America benefit from high prices. In addition, the artificial intelligence capex boom is seen as a tailwind for the developing world. Investors snapped up bonds from energy exporters Brazil and Qatar, while sales from Turkey and Poland were also well received, as new bonds typically pay slightly higher yields than existing issues. Among corporates, well-known names such as Banco do Brasil SA returned to market, alongside smaller firms like Kyrgyzstan’s Eldik Bank, which used the improved backdrop to make its dollar-market debut.They were all encouraged by a slide in borrowing costs since Iran and the US agreed a two-week ceasefire. The average yield premium investors demand to hold emerging sovereign dollar bonds relative to Treasuries has retreated to about 245 basis points — below levels seen just before the war started. “With spreads where they are, it makes sense to issue,” said Carmen Altenkirch, emerging markets sovereign analyst at Aviva Investors. “Sovereigns often wait for periods of relative calm to issue, particularly regular issuers like Turkey.” Dry PowderThe April sales rebound means year-to-date issuance is already running almost 20% above year-ago levels, at $281 billion.The revival is similar to the activity uptick across developed markets. Sovereigns such as Italy and Britain saw record demand for their new bonds, but sales of junior-ranked debt — typically seen as higher-risk — have also boomed this month.One reason is that many investors are keen to use the dry powder they accumulated during the March selloff, as any deal to end the war is likely to set off an even bigger rally in world markets. “EM is far from the only market where conditions seem relatively unaffected by the geopolitics,” said Kieran Curtis, head of emerging-market local currency debt at Aberdeen Group Plc. “My sense is that portfolio managers raised a lot of cash last month. Outflows, in the event, were very limited, so now investors need to spend and issuers are taking advantage.”Brazil used the opportunity to sell its biggest-ever bond, raising €5 billion via its first euro-denominated issuance in over a decade. Fund managers were also happy to lend to Turkey despite its vulnerability to higher energy prices. They snapped up its $2 billion issue placing bids for three times the amount on offer. Still, buyers did extract a roughly 15-20 basis-point new issue premium from Turkey, well above the five basis points they got during previous sales, UBS Group SA strategist Nimrod Mevorach estimates. Poland, another energy importer, paid an 12-15 basis-point premium when it raised $6 billion earlier in April, he said, contrasting with virtually no premium at its previous issuance. An even more remarkable indicator of demand was the $1.25-billion debut issue from Democratic Republic of Congo. Investors placed bids for four times that amount, possibly lured by yields of 8.75% and 9.5% respectively on the two deal tranches. Manuel Mondia, a portfolio manager at Aquila Asset Management AG, said that DRC, while fragile, has low debt levels and exports large amounts of copper, a key input for AI-linked capex. “This was a nice deal for bondholders, and in a time when these spreads are becoming rarer,” said Mondia who bought the bond. “The hunt for yield overcomes the fear of conflict and contagion.” What to Watch:—With assistance from Ray Ndlovu and Mpho Hlakudi.Postmedia is committed to maintaining a lively but civil forum for discussion. Please keep comments relevant and respectful. Comments may take up to an hour to appear on the site. You will receive an email if there is a reply to your comment, an update to a thread you follow or if a user you follow comments. Visit our Community Guidelines for more information.