Record Pace of Emerging-Market Bond Sales as Fed Hikes LoomBy
Year-to-date developing-nation bond sales above $100 billion
Kuwait, Nigeria, Lebanon are readying new bond issuance
Emerging-market borrowers are selling bonds at an unprecedented pace before the Federal Reserve raises interest rates.
Kuwait picked banks on Wednesday for a deal said to be targeting as much as $9.5 billion. Oman also launched a sale and more transactions are due from countries including Lebanon and Nigeria. Emerging-market issuance in dollars and euros this year has already exceeded $100 billion, Bloomberg data show. That’s the fastest pace ever and almost 20 percent more than the previous record for the period in 2014.
Raising capital has become cheaper for developing-market borrowers since the immediate aftermath of the U.S. presidential election, with emerging bond yields easing about 50 basis points. That’s unlikely to last, however, as Fed officials want to increase interest rates and two policy makers signaled this week that the case for hiking in March has strengthened.
“Yields are attractive and outlook on rates and downside risks are prompting issuers to consider funding early this year,” said Samad Sirohey, head of debt capital markets for central and eastern Europe, the Middle East and Africa at Citigroup Inc., the bank that’s managed the most bond sales in the region this year.
Borrowers are also being helped by robust demand from investors seeking respite in the 4.7 percent average yield offered by emerging-market bonds compared with about 2.4 percent on 10-year U.S. government notes. Egypt’s $4 billion deal at the start of February was more than three times subscribed while Nigeria drew $7.8 billion of orders for its $1 billion offer, prompting it to tighten the yield by more than 60 basis points.
Weekly inflows into emerging-market bonds funds were running at a rate of more than $1 billion in February, according to EPFR Global.
The flow of issuance may yet face disruption from surprise results in some of the European elections this year, such as France, or a sooner-than expected rate hike from the Fed, according to Sergey Dergachev, who helps oversee about $13 billion in assets as a senior money manager at Union Investment Privatfonds GmbH in Frankfurt.
The Slovak Republic is selling 2 billion euro ($2.1 billion) of 20-year bonds on Thursday and Mongolia is seeking to raise dollar financing through a sale of 7-year notes. Lebanon has mandated banks for a planned bond sale that’s expected to bring in at least $1.5 billion, according to a Lebanese official.
With yields still favorable to borrowers, they may accelerate plans to refinance maturing debt as soon as possible, according to Citi’s Sirohey.
“Issuers are keen to lock in current yields in early refinancing,” he said. Those “that were priced out of the market a year ago are able to fund themselves at attractive cost.”