Emerging Market Bond Sales Face Headwinds Amid High US Treasury Rates
Despite a robust start to 2025, emerging market (EM) bond sales are facing challenges due to elevated US Treasury rates.
Sovereign Issuance Dominated by Investment-Grade Credits
While several EM sovereigns rushed to market early in the year, seven out of eight issuers have investment-grade credit ratings, indicating a trend towards better-quality credits. Benin remains an exception, having recently placed a $500 million bond.
Corporate and Government-Linked Borrowers Facing Constraints
Among EM corporates and government-linked borrowers, junk-rated entities (rated below BBB-/Baa3) have seen a significant decline in debt sales. Data shows a 7% drop from the same period in 2024, marking the slowest start since 2020.
Arab Banking Corp. Withdraws Bond Issue due to Low Yields
Bahrain's Arab Banking Corp. was forced to withdraw its bond issue due to insufficient investor demand.
Rising Treasury Rates and US Dollar Strength Impact
According to Mohammed Elmi of Federated Hermes, EM markets are adjusting to higher US rates and inflation. The "America First" policies of the incoming Trump administration could exacerbate the situation.
EM Dollar Bonds Face Yield Increases
The average yield on EM dollar bonds has increased by over 40 basis points in recent weeks, with single-B rated borrowers experiencing a 54 basis-point jump.
High-Yield Borrowers Facing Difficult Choices
High-yield borrowers are faced with paying new-issue premiums, accessing international organizations, or waiting for market conditions to improve.
Alternative Funding Sources Gain Traction
Private markets, bridge loans, and currency diversification are emerging as alternative funding options. Angola, for instance, has utilized repo operations with JPMorgan for collateral-backed financing.
Private Credit Markets Offer Flexibility
According to Mihai Florian of RBC BlueBay Asset Management, private credit markets provide better flexibility for high-yield EM borrowers.
Stabilization of Treasury Yields Brings Optimism
The recent stabilization of Treasury yields has eased concerns among some investors, as data and policymakers' comments suggest a potential for Federal Reserve interest rate cuts.
Investment-Grade Issuance Expected to Precede High Yield
Analysts anticipate that investment-grade borrowers will lead issuance, followed by high yield.
Upcoming Economic Events
* Bank Negara Malaysia's overnight policy rate decision on Wednesday
* South Africa's CPI data on Wednesday, expected to show a rise in monthly price gain
* Turkey's central bank's policy rate decision on Thursday, anticipated to cut rates
* South Korea's weak GDP growth forecast for Q4 due to political crisis