Emerging-market borrowers completed the busiest ever start to a year, selling $197 billion of bonds on international markets to secure funding while interest rates in the U.S. and Europe stay at all-time lows.
Governments from Turkey to Hungary and companies including Banco do Brasil SA boosted offerings above last year’s record for a first quarter by $25 billion, according to data compiled by Bloomberg from 1999. With developing economies growing more than twice as fast as advanced nations, issuers such as Braskem SA and United Microelectronics Corp. said they plan further bond sales to raise at least $11.5 billion.
“This is a pretty good time to be borrowing, absolute rates are low and prospectively rates are going up,” Ian McCall, who helps oversee about $500 million of emerging-market debt as a director at Argo Capital Management Ltd. in London, said in a phone interview. “So if you’re thinking of borrowing at some point in say the first three quarters of this year, you’d probably want to frontload that.”
Sales are surging after near-zero global interest rates and the Federal Reserve’s quantitative easing fueled the biggest investor flows to emerging-market debt on record in 2010, based on data from EPFR Global. Turkey sold $1 billion of 30-year bonds on Jan. 5 at its lowest yield for the maturity, at 6.25 percent. Hungary, the European Union’s most-indebted eastern member, met about 67 percent of its annual bond issuance target on March 24 by raising $3.75 billion in its largest foreign debt sale.
The Fed should review whether to wind down its second round of quantitative easing, the policy of buying Treasuries dubbed “QE2,” because “the economy is looking pretty good,” Fed Bank of St. Louis President James Bullard said on March 26. An end to the stimulus measure would be a move toward a policy of monetary tightening that would eventually include raising interest rates, Bullard said.
The yield on two-year U.S. Treasuries has risen to 0.79 percent from 0.33 percent on Nov. 4, the lowest since the Bloomberg data series began in 1976, amid signs the U.S. economy is recovering. Gross domestic product grew 3.1 percent in the fourth quarter, the Commerce Department said March 25. Growth for the period was estimated at 2.8 percent a month earlier.
European Central Bank President Jean-Claude Trichet said on March 3 that “an increase of interest rates” was “possible” when policy makers next meet in April. The bank kept its benchmark rate at a record-low 1 percent.
“It’s great for these guys to get their bonds out the door today rather than later so they can lock in the Treasury yield,” Scott Bennett, the head of Asian credit at Aberdeen Asset Management Plc, which oversees $287 billion globally, said in a phone interview from Singapore yesterday. Bennett said he subscribed to a $200 million bond sale by India Railway Finance Corp. Ltd. this week.
Sales of developing-nation debt in all of 2010 reached an all-time high of $710 billion, data compiled by Bloomberg show.
The pace of government borrowing may slow as debt costs increase and the recovery in developing economies cuts the need to finance deficits, said Rajeev de Mello, who helps oversee $454 billion as head of Asian investment in Singapore at Western Asset Management Co., the Pasadena, California-based fixed-come unit of Legg Mason Inc.
Russia has no need to borrow internationally after higher oil prices boosted government revenue, Deputy Finance Minister Dmitry Pankin said in an interview in Moscow on March 16. The government raised 40 billion rubles ($1.4 billion) in its first international sale of debt in its own currency on Feb. 24.
The Philippines, which sold $1.5 billion of 15-year dollar debt on March 22, had its second budget surplus in three months in January as spending fell, tax collection beat targets and dividends from state agencies boosted revenue, the government said on March 15. Improving finances in the Philippines should reduce its borrowing needs, de Mello said.
“Issuance won’t be going up all that much,” de Mello said. “The sovereigns are getting higher-than-expected revenue.”
Developing nation yields, which fell to a low of 5.3 percent in November, climbed to 6.3 percent on March 29 as Fed policy makers weigh the first steps toward monetary tightening, JPMorgan Chase & Co.’s EMBI indexes show.
The yield on Turkey’s 30-year bonds has risen to 6.5 percent since the January sale. Turkey is rated Ba2 by Moody’s Investors Service, the second-highest junk rating.
Hungary could have sold triple the amount based on the orders received, according to an e-mailed statement from AKK, the debt management agency.
Banco do Brasil, Latin America’s biggest lender by assets, issued 750 million euros ($1.06 billion) of bonds due 2016 in January. The yield has risen 37 basis points since it first traded to 4.8 percent today. The Brasilia-based lender’s yield is still lower than London-based Lloyds Banking Group Plc, Britain’s biggest mortgage lender, whose euro-denominated bonds due in 2014 and first sold in 2002 yielded 5 percent today.
Both banks are rated Baa2 by Moody’s, its second-lowest investment-grade ranking.
Mutual funds seeking higher yields plowed $53 billion into developing-nation debt in 2010, more than any other year on record, according to Cambridge, Massachusetts-based EPFR.
Yields on emerging-market company bonds have climbed 45 basis points to 5.8 percent from the low on Nov. 5, according to the JPMorgan’s Corporate EMBI Index.
Emerging-market economies will probably grow 6.1 percent this year, compared with 2.6 percent expansion for developed nations, according to the International Monetary Fund.
While growth will boost government tax receipts, companies will keep tapping the debt market to finance expansion, according to Stephen Chang, head of Asian fixed income in Hong Kong at JPMorgan Asset Management, which oversees $1.3 trillion worldwide.
“Corporate issuance should increase as a function of the economic growth picture in emerging markets and the corresponding credit growth,” Chang wrote in an e-mailed response to questions on March 25.
Braskem, Latin America’s largest petrochemicals producer, may sell 10-year bonds overseas over the next three months, Chief Financial Officer Marcela Drehmer said on March 22. The company, which has the highest junk rating at Ba1 from Moody’s, more than doubled its annual profit to 1.9 billion reais ($1.1 billion) last year.
Taiwan-based United Microelectronics, the world’s second-largest contract maker of chips, said on March 16 it planned to sell as much as $500 million of five-year convertible bonds overseas to buy equipment. Sales rose 43 percent in dollar terms in 2010, according to data compiled by Bloomberg.
“Issuance will continue to be quite strong,” Vladimir Gersamia, who helps manage $2 billion at Threadneedle Asset Management in London, said in a phone interview on March 23. “The structural theme of emerging markets is developing and these companies growing, I don’t think it will slow.”