Emerging market governments have raised more than $40bn on international bond markets so far this year, as an easing of global inflationary pressures and hopes of an economic rebound in China clear the way for the fastest January borrowing spree on record.
A bruising sell-off that swept global fixed income last year, as big central banks responded to runaway inflation by sharply raising interest rates, effectively shut many borrowers in the developing world out of bond markets for long periods. But money has flooded back into bonds in the new year on further signs that inflation may have peaked in the US and the eurozone, with countries including Mexico, Hungary, and Turkey launching large bond sales.
“Last year, patience didn’t really pay off, the market continued to get worse as it went on,” said Stefan Weiler, head of CEEMEA debt capital markets at JPMorgan. “So this year, many sovereign borrowers have jumped through this window of opportunity as quickly as they could.”
Fourteen emerging market sovereign borrowers raised a total of $41bn from the start of January up until Thursday, according to data from Dealogic. That far outpaces the early days of any previous January, typically a busy month for debt sales, according to Bank of America strategists — the only year with a larger amount raised across the entire month was 2021 with $48.7bn.
The flurry of sales has come as emerging market bond prices rebound from 2022’s heavy losses. A JPMorgan gauge of emerging market foreign currency debt is up 1.7 per cent so far in January, having fallen by 17.8 per cent last year. Investors have dialled back their expectations of further interest rate increases in big developed economies, removing a headwind for emerging market debt.
Traders are now betting that the Federal Reserve will now increase rates by just a quarter of a percentage point next month after US inflation declined to the lowest annual pace in more than a year.
The reopening of China’s economy — a crucial engine of growth in the developing world — as draconian Covid-19 restrictions are lifted has added to the sense of optimism.
“The scrapping of the zero Covid policies has happened much faster than most people expected,” said Uday Patnaik, head of emerging markets debt at Legal & General Investment Management. “While [developed] countries are expected to go into recession, if you look at large EM economies, the only one forecast to be in recession this year is Russia.”
The scale of issuance also reflects demand from end investors who are warming to fixed income after last year’s bloodbath, according to Patnaik, who participated in recent bond sales by Israel, Turkey and Mexico. He said: “We are seeing interest in new mandates coming into EM partly because yields are so much higher. There is money that needs to be put to work, and issuers are taking advantage of that.”
Still, a global downturn could mean the current calm does not last, particularly for riskier emerging debt, some analysts argue. That prospect has made this month’s emerging market borrowing dash all the more urgent, argues Cristian Maggio, head of portfolio strategy at TD Securities.
“Some issuers may have decided to front-load,” he said. “If we are right that there will be a recession in several key economies I don’t think market conditions are necessarily going to stay benign.”