Bond Auctions Fail From Russia to Korea as Brazil Protests RageYe Xie, Lilian Karunungan and David Yong
Developing nations around the world are scaling back or canceling billions of dollars of bond sales as borrowing costs climb the most since 2008, just as spending needs increase amid slowing economic growth.
Romania’s Finance Ministry rejected all bids at a seven-year bond sale yesterday because of market volatility, while South Korea raised less than 10 percent of the amount planned in an auction of inflation-linked bonds. Russia scrapped a sale of 15-year ruble-denominated bonds June 19, the second time it canceled an auction this month, and Colombia pared an offering of 20-year peso debt by 40 percent. A cash shortage led to failures last week of China Ministry of Finance debt sales.
The tumble in bonds, stocks and currencies, spurred by investors’ biggest retreat from emerging markets in two years, is tightening credit as the Federal Reserve says it may end cheap money that had made investment plentiful. Yields on local-currency emerging-nation bonds surged 82 basis points this month to 6.58 percent, the biggest increase in five years. In Turkey and Brazil, anti-government protests are challenging development plans that require additional funding.
“Trying to issue local-currency debt is much more difficult, because nobody wants it, and U.S. dollar debt, which there’ll probably be some demand for, is just going to be a lot more expensive,” Michael Shaoul, chairman of Marketfield Asset Management, which oversees about $10 billion, said in a phone interview in New York. For countries with a high level of debt service payments, “you’re going to see a significant worsening of the fiscal position,” he said.
More than $6.9 billion left funds investing in developing-nation debt in the four weeks to June 19, the most since 2011, according to Morgan Stanley, citing EPFR Global data. The exodus is reversing the $3.9 trillion of cash that flowed into emerging markets in the past four years as China’s annual economic growth averaged 9.2 percent and spurred demand for Brazilian iron ore, Russian oil and gas and Chilean copper.
Fed Chairman Ben S. Bernanke said June 19 that the central bank may taper its monthly purchases of $85 billion in assets later this year and halt them around mid-2014 as long as the world’s largest economy performs in line with its projections. China’s benchmark money-market rate climbed to a record and a preliminary report showed manufacturing shrank at a faster pace this month.
MSCI Inc.’s emerging-market stock index slumped for a fourth day and was headed toward the biggest weekly loss in 13 months. Brazil’s real touched a four-year low this week while the Indian rupee and Turkish lira sank to records.
The MSCI index fell 0.9 percent to a one-year low of 900.54.
Brazil’s Treasury sold 17 percent of the fixed-rate securities and 88 percent of the zero-coupon bonds it offered at auctions today. Yields on the benchmark fixed-rate bonds due 2021 held at a 17-month high of 11.57 percent today and have increased 172 basis points over the past month.
Romania rejected all 688 million lei ($201 million) of bids at a bond sale yesterday because of “unacceptable price offers,” according to an e-mailed statement from the central bank. It was the first failure since August.
South Korea sold just 9 percent of the 600 billion won ($520 million) it targeted from 10-year inflation-linked bonds this week. Colombia’s government pared an auction on June 19 of 20-year inflation-linked peso bonds by 40 percent, to 150 billion pesos ($77 million).
“The tapering genie is now out of the bottle and that will have some big implications,” Adrian Zuercher, head of emerging-market strategy at Credit Suisse (Hong Kong) Ltd., an asset management unit of Credit Suisse Group AG that oversees $450 billion, said in an interview yesterday. “The competition for emerging-market bonds has increased and investors will ask for higher yields there.”
Russia canceled planned sales of 10 billion rubles ($304 million) of notes this week, citing a lack of demand within an acceptable yield range of 7.70 percent to 7.75 percent. Yields on ruble bonds due in 2028 jumped 30 basis points, or 0.30 percentage point, yesterday to 8.1 percent, the highest level since the debt was sold in January.
The Russian Finance Ministry scrapped a June 5 auction ahead of schedule and shelved a sale on May 22 due to a lack of competitive bids.
In China, the Finance Ministry sold 9.53 billion yuan ($1.6 billion) of 273-day bills June 14, falling short of the 15 billion-yuan target, according to Chinabond, the nation’s biggest bond-clearing house. It was the first time the government didn’t sell all of the debt offered at an auction in 23 months. Countries including Indonesia and Egypt also scaled back debt sales this month.
“Bond auctions in emerging-market Asia have been poorly received and that’s likely to continue as long as market volatility remains,” Wee-Khoon Chong, a Hong Kong-based strategist at Societe Generale SA, said in an interview yesterday. “While the higher yields would make bonds more attractive, the severe upside pressure in rates for now is likely to see more investors and dealers at the side line.”
Some countries are better prepared than others for the prospect of Fed policy changes.
Mexico’s government took advantage of lower borrowing costs earlier this year to lock in yields on benchmark bonds as low as 4.48 percent as it boosted the average local-currency debt maturity to 8.25 years, about 14 times longer than in 1994, the year of the Tequila Crisis, when U.S. interest rate increases helped spark a peso devaluation that fueled capital outflows across Latin America.
Poland has financed 88 percent of this year’s borrowing needs and may not hold any bond sales in July and August if markets are unfavorable, Deputy Finance Minister Wojciech Kowalczyk said at a parliamentary hearing in Warsaw yesterday. Yields on 10-year Polish bonds increased to 4.26 percent yesterday, the highest level since November.
Auctions typically fail because governments don’t want to sell the bonds at expensive prices, not because they are unable to attract enough buyers, according to Arturo Porzecanski, a professor of international finance at American University.
“Governments usually can get the funding that they want,” Porzecanski said in a phone interview in New York. “It’s a question of the yield they’re willing to validate.”
Countries with higher debt-to-gross domestic product ratios, such as Brazil at 59 percent, face the biggest challenges as borrowing costs rise, according to Marketfield’s Shaoul.
Malaysia, Brazil, Czech Republic, Hungary and Turkey have the highest funding risk among developing nations because they are those with larger borrowing needs and have only met a small portion of their requirements for the year, Citigroup Inc. analysts led by Monty Gandhi wrote in a report dated yesterday.
The disruption comes at a time when emerging economies are slowing more than previously anticipated. China’s manufacturing is shrinking at a faster pace this month as the Purchasing Managers’ Index fell to 48.3 in June from 49.2, according to a preliminary reading released yesterday by HSBC Holdings Plc. and Markit Economics.
The World Bank lowered its forecast this month for China’s expansion in 2013 to 7.7 percent, which would be the slowest since 1999, from an 8.4 percent estimate in January. The Washington-based institution cut its forecast for developing-nation growth this year to 5.1 percent, from 5.5 percent.
Government reports showed yesterday that Russian consumer spending decelerated in May, with disposable incomes unexpectedly shrinking for the first time since October 2011.
“The emerging market fundamentals have been deteriorating,” Rashique Rahman, a developing-market strategist at Morgan Stanley in New York, said in a phone interview yesterday. “Volatility has raised risk premium, suggesting monetary conditions are tightening. There’s a possibility it could develop into a negative feedback loop.”
The lack of reforms to improve productivity over the last few years has exhausted the growth potential among major developing economies, fueling social unrest, according Rahman.
Anti-government protests, sparked by anger over a planned development in Istanbul, spread nationwide in Turkey May 31, marking the most serious unrest during Prime Minister Recep Tayyip Erdogan’s decade in power.
In Brazil, protests erupted over an increase in bus fares and have spread across the country in the biggest demonstrations in the South American country in two decades. While authorities in Sao Paulo and Rio de Janeiro said June 19 that they were scrapping fare changes, rallies for better public services and an end to corruption drew almost 1 million people in 27 capital cities yesterday, Folha newspaper reported. A teenager and 54-year-old street cleaner died during the protests, according to local officials and military police.
“What we need to see is policy reforms and adjustment,” said Morgan Stanley’s Rahman. “These are difficult challenges.”
In the overseas markets, average dollar borrowing costs for developing-country companies increased to a one-year-high of 5.86 percent yesterday, according to data compiled by JPMorgan Chase & Co.
The increase in yields is causing companies to delay funding efforts. Minerva SA, Brazil’s third-largest beef producer, canceled a plan to sell perpetual dollar-denominated bonds June 17, four days after Odebrecht SA, a Salvador, Brazil-based construction and engineering firm, pulled a debt offering.
Isagen SA, Colombia’s second-biggest publicly traded power company by sales, said June 18 that it will delay a planned local bond offer as yields in the country jumped to 16-month highs.
At least 11 Chinese companies, including Guangdong Construction Engineering Group Co., has delayed bond sales this week as the nation’s cash crunch persists.
While Brazil has taken advantage of falling prices to buy back bonds and said it has enough reserves to buffer swings in the market for three to six months, higher U.S. yields will continue to lure capital away from developing nations, according to Paul McNamara, who manages $9 billion in emerging-market debt at GAM Investment. U.S. Treasury yields touched 2.47 percent yesterday, the highest level since August 2011.
“It’s going to be painful,” said McNamara in a phone interview from London yesterday. “People don’t catch a falling knife.”