Optimism Emerges From Russia to Turkey With Bond ReboundYe Xie, Sonali Basak and Katia Porzecanski
Bonds are proving a salve for emerging markets after the worst start to a year in the currencies and stocks of developing nations since 2010.
Two weeks after emergency measures by Turkey’s central bank pulled the lira back from a record low, the government sold $1.5 billion of 31-year dollar bonds yesterday in its longest-dated debt in the currency ever. Russia issued 20 billion rubles ($569 million) of notes after back-to-back flops, while Slovenia a day earlier sold its first dollar-denominated notes since the nation’s banking industry was overhauled last year.
The access to capital is giving investors comfort that the worst of the rout may be over even after investors pulled $25 billion from emerging-market bond and stock funds amid concerns that slowing growth in China and a pullback in U.S. monetary stimulus will sap economies from South Africa to Russia. Developing-country governments have already raised enough dollars to cover more than a third of their financing needs this year, bolstering their ability to weather the market volatility.
“I can’t tell you how many times in the last couple years I’ve seen ‘It’s the end of emerging markets,’” Katia Bouazza, co-head of global capital markets for the Americas at HSBC Holdings Plc said yesterday at a New York conference hosted by LatinFinance. “We have to ride the market volatility but we have to look closer at fundamentals. I would say to somebody looking at this market not to be discouraged.”
The extra yield investors demand to hold dollar-denominated emerging-market government bonds instead of U.S. Treasuries fell to 334 basis points, or 3.34 percentage points, yesterday after reaching a seven-month high of 366 basis points on Feb. 3, according to JPMorgan Chase & Co.’s EMBI Global Diversified Index. The spread increased 4 basis points today to 338 as of 10:08 a.m. in New York.
Gains of 1.2 percent this month have erased losses this year that had ballooned to as much as 0.7 percent at the height of the turmoil, the index data show. Bonds denominated in local currencies have declined 3 percent since Dec. 31 after dropping as much as 5.1 percent on Feb. 3.
The healing in debt markets coincided with a second day of gains for MSCI Inc.’s emerging-markets stocks index, which pared a loss for the year as China’s exports rose more than analysts forecast. A Bloomberg gauge of the 20 most-traded currencies rose to a three-week high yesterday.
The International Monetary Fund kept its growth forecast for developing countries this year at 5.1 percent on Jan. 21, while raising the outlook for advanced economies to 2.2 percent, from the 2 percent estimated in October. That would mark the narrowest growth difference between the two since 2001.
Developing countries including Slovenia, Indonesia and Mexico have raised $33 billion in dollar debt this year through Feb. 11, the most for the same period since Bloomberg started tracking the data in 1999. That represents 38 percent of the funding Morgan Stanley estimates they need this year for interest and principal payments on their debt.
“This will be a bumpy year, and people will just pick and choose their windows,” Ajata Mediratta, co-president of Greylock Capital Management, which oversees about $500 million, said in an interview in New York.
Worldwide, relative yields on corporate bonds from the most creditworthy to the riskiest borrowers fell to 184 basis points yesterday after reaching an almost two-month high of 193 basis points on Feb. 4, according to the Bank of America Merrill Lynch Global Corporate & High Yield index. They’ve increased from a six-year low of 177 basis points on Jan. 22.
Spreads on speculative-grade bonds, which rose as much as 46 basis points in the past month to reach 455 basis points on Feb. 4, narrowed to 428 basis points yesterday, index data show.
Turkey is coming back to the market after the central bank boosted its three main interest rates at a midnight emergency meeting on Jan. 28, raising the one-week repurchase rate to 10 percent from 4.5 percent. The lira strengthened for a third day yesterday, while the nation’s cost to borrow in dollars fell to a two-month low of 5.73 percent on Feb. 11.
The country’s assets were under pressure this year as it struggles to attract capital to finance its current account deficit while Prime Minister Recep Tayyip Erdogan’s government fought allegations of graft. Standard & Poor’s last week lowered its outlook on Turkey’s BB+ credit rating to “negative.”
Yesterday’s bond sale, together with a $2.5 billion 10-year note issuance in January, helped Turkey raise enough cash to meet two-thirds of its debt obligations this year, according to Roberto Sanchez-Dahl, who oversees about $2.5 billion in emerging-market debt at Manulife Asset Management in Boston.
“The fact that they’re able to come to the market today gives the market some comfort,” Sanchez-Dahl said in a phone interview. “The market has some comfort that the crisis in Turkey is not going to expand.”
Slovenia raised $3.5 billion in its debt offering Feb. 11. Yields on Slovenia’s bonds due in 2022 approached a low for the year, declining to 5.1 percent as the government started cleaning up the banking system.
In Russia, the Finance Ministry issued 10 billion of ruble bonds due in 2023 at 8.06 percent, compared with 8.39 percent on Jan. 31.
The auctions will open the door for local companies to raise capital in the bond market, analysts led by Alexey Demkin at OAO Gazprombank, wrote in an e-mailed note.
“There’s too much pessimism over the emerging markets generally,” Geoff Lewis, global market strategist at JPMorgan Asset Management said in an interview with Bloomberg TV’s Angie Lau and Rishaad Salamat in Hong Kong yesterday. “I think it’s been a bit of overreaction.”
The sentiment was echoed by investors including Mark Mobius of Templeton Emerging Markets Group, who said this week that the exodus from developing nations is “almost over.”
Morgan Stanley yesterday maintained its sell rating for emerging-market debt, saying average borrowing costs for developing countries and companies need to increase to 7.5 percent from 6.25 percent before credit risk is “appropriately” priced. Currency declines and higher interest rates will hamper economic growth and weaken corporate balance sheets, according to the New York-based bank.
“We anticipate further re-pricing in EM credit,” strategists including Paolo Batori wrote in a note. “Valuations remain rich and, what’s more, the recent FX weakness and increased cost of funding are set to generate a negative feedback loop from the external into the domestic fabric of the EM economies.”
Edwin Gutierrez, who manages $10 billion of emerging-market debt at Aberdeen Asset Management Plc said he sees “zero value” in Turkey’s new 30-year bonds as the yields are not high enough.
“It’s two days” of optimism out of “a year of idiosyncratic risk,” Gutierrez said in a telephone interview from London.
The more than $25 billion that left global funds investing in emerging-market stocks and bonds this year through Feb. 5 was already approaching the full-year outflow of $29 billion in 2013, according to Barclays Plc, citing data from EPFR Global.
Developing-nation exchange traded funds in the U.S. had about $100 million of outflows since MSCI’s emerging-markets index reached its low of the year on Feb. 5, while foreigners pulled $892 million from bourses in South Korea, India and Brazil, data compiled by Bloomberg show.
Even as JPMorgan’s emerging-market dollar bond index lost 3 percent during the past 12 months, it’s less than the 12 percent decline in 2008 and 8 percent drop in 1998 when Russia defaulted.
“We’ve been through crises and this is not a crisis,” said Mediratta at Greylock, which helped negotiate Greece’s debt swap. “When emerging markets get out of favor and people have to start reducing their weightings, that’s when you see outflows. But once that stops, things reprice.”