(Bloomberg) -- Strong demand from yield-hungry investors is driving a surge in developing-world bond sales as borrowers race to secure financing ahead of any further wobbles in global markets.
Since the beginning of the year, emerging-market governments and companies have sold $331 billion in debt denominated in hard currencies like the dollar and euro, according to data compiled by Bloomberg. That is the fastest pace in four years and already surpasses the total in the first half of 2024.
Investors have fueled a broad rally in international assets amid questions about the long-standing dominance of US markets, which have sent the value of the dollar down. Bank of America Corp. and JPMorgan Chase & Co. both forecast that EM assets should gain with a declining dollar, while Societe Generale said local assets in developing nations are going through a “goldilocks” moment.
The extra yield investors demand to hold dollar bonds from emerging countries over US Treasuries has fallen and is inches away from the lowest level since 2020, according to a JPMorgan index. But demand has held up because spreads are tighter in US markets as well.
“If you’re a CFO or treasurer you go when the window is open,” said Omotunde Lawal, head of EM corporate debt at Barings Investment Services. “If US fiscal concerns keep on the top of minds then US yields will push higher — so maybe best to issue now rather than later.”
A lack of clarity about the strength of the US economy is also leading many borrowers to issue bonds quickly in case there is more turmoil ahead, according to Stefan Weiler, the head of debt capital markets for Central Europe, the Middle East and Africa at JPMorgan in London.
“From a borrower perspective, the incentive of being patient has gone,” Weiler said. If there is a US recession, which JPMorgan assigns a 40% probability to, spreads would likely widen, making it more expensive for emerging markets to borrow, he added. “It’s really more about accessing the market when it’s available.”
The strong issuance began early in the year as developing nations around the world moved past a wave of post-pandemic defaults in 2024 and countries from Vietnam to Chile announced new economic reforms.
While there was a slowdown immediately after US President Donald Trump announced global tariffs in early April, causing volatility to skyrocket, the market for emerging bonds bounced back strongly after the threat of harsh levies faded. The lull may be short-lived as the administration is set to review tariff policies in early July.
“EM has proved to be a comparative safe haven over this period,” according to Carmen Altenkirch, an analyst at Aviva Investors. “Fundamentals have continued to improve, and sovereigns are getting rewarded for their prudence.”
High Grade
Investment-grade borrowers have accounted for more than 70% of the total bonds issued this year, data compiled by Bloomberg show. Mexico landed a record deal at the start of the year, while Saudi Arabia sold $12 billion in a triple-tranche transaction and activity out of China also picked up.
In the Middle East, where most borrowers are investment-grade, funding needs surged amid the collapse in oil prices. The region has seen strong deal activity and will likely account for more than 40% out of all CEEMEA issuance this year, according to Weiler.
The return of Latin American companies, many of whom had not been active in offshore markets, also helped drive volumes higher, said Adrian Guzzoni, head of debt capital markets for the region at Citigroup Inc. He’s expecting full-year volumes for Latin America to surpass last year’s figures.
Some high-yield names, such as Brazil, Peru and Telecom Argentina SA have also recently tapped markets. Kyrgyzstan raised $700 million in its first-ever international bond sale, attracting over $2.1 billion in demand for its five-year notes at a yield of 8%.
But not all junk issuers can take advantage of this window, highlighting the bifurcation in the developing world in times of high uncertainty.
“Higher Treasury yields, trade uncertainty, and lower oil prices place many lower-rated frontier countries at a distance from market access,” said Samy Muaddi, head of emerging-markets fixed income at T. Rowe Price Associates, Inc. in Baltimore.
Morgan Stanley strategists are expecting nations like Poland, Romania, Kuwait and Kazakhstan to tap the market soon. Central America countries like Costa Rica and Guatemala may also turn up, said Claudia Calich, head of EM debt at M&G Investment Management.
“If anybody wants to issue, we still have probably a four- to six-week window now,” said Calich. “Otherwise, you have to wait until September.”
What to Watch
--With assistance from Maria Elena Vizcaino and Kevin Simauchi.