Emerging market borrowers are moving swiftly to bolster their financial defenses as they anticipate economic turbulence, especially from the US, which could disrupt refinancing plans and shake their biggest markets. With the US presidential election on the horizon and fears of global economic slowdown, developing countries are seizing the moment to access capital markets.
Record Bond Issuance in September
In the first five days of September, borrowers from the developing world issued more bonds than at the start of any previous September. According to Bloomberg data, governments and companies raised $28 billion through bond sales by Friday, a significant increase compared to the $12 billion issued during the same period last year.
Rushing to Beat US Election and Market Volatility
Many borrowers are rushing to lock in financing ahead of the US presidential election in November, fearing a market shock similar to the one that occurred on August 5. On that day, jittery investors withdrew from emerging market currencies and other assets, leading to the steepest borrowing cost increase for emerging markets in six years, based on a JPMorgan index.
Strategic Moves to Avoid Market Risks
“Most issuers have wisely chosen to enter the market before potential volatility hits,” said Alexander Karolev, head of JPMorgan Chase & Co.’s CEEMEA bond syndicate desk. As a result, he predicts that bond issuance will drop significantly in the coming weeks, driven by heightened risks tied to economic and political events.
Taking Advantage of Low Yields
Borrowers are currently benefiting from some of the lowest yields in two years, with an average rate of 6.5%, according to a Bloomberg index tracking dollar-denominated government and corporate debt. These favorable conditions have provided a green light for issuers to access primary markets while interest rates remain low.
Investors Eager to Participate Before Rate Cuts
As emerging market borrowers accelerate their borrowing plans, investors are willing to oblige, knowing that potential interest rate cuts could drive yields even lower. This week saw notable bond issuances from Abu Dhabi National Oil Co., Indonesia, and Uruguay.
Federal Reserve Rate Cuts Could Add to Volatility
Expectations for aggressive interest rate cuts by the Federal Reserve are increasing as the US economy presents mixed signals. Last Friday’s jobs report revealed slower-than-expected growth, adding to concerns. Volatility in US interest rates suggests that more economic uncertainty could lie ahead.
Emerging Markets Face Economic Slowdown Risks
“A major slowdown in the US would have negative repercussions for emerging markets,” warned Nick Eisinger, co-head of emerging markets active fixed income at Vanguard Asset Services Ltd. He added that the current environment presents a key opportunity for issuers to lock in borrowing terms before conditions worsen.
Dollar Bonds Dominate Emerging Market Debt
The US dollar has become the favored currency for hedging against market volatility due to its liquidity and size. Dollar-denominated bond deals have surged this year, outpacing those in other major currencies like the euro. In fact, 86% of bond issuances this week were in US dollars, a notable increase from the 78% average in 2023.
Monitoring US Elections and Economic Risks
Emerging market issuers are paying close attention to the US political and economic landscape, especially with the presidential election approaching. Analysts warn that if concerns over US growth intensify, bond spreads could widen rapidly, making market conditions less favorable for new issuances.
Emerging Market Dollar Bonds Surge in 2024
Dollar bond sales by emerging market governments and corporations have surged 54% this year to $349 billion, marking the highest year-on-year increase since 2012. By comparison, euro-denominated bond sales grew by 26% to €64 billion, while other major currencies, including the yen, franc, and pound, accounted for $9 billion combined.
The Deep Liquidity of Dollar Bonds
Kaspars Abolins, head of Latvia’s Treasury department, emphasized the dollar’s “deep liquidity,” which makes it ideal for large-scale borrowing. Latvia, which issued dollar bonds for the first time in over a decade this May, expects to be a regular participant in the dollar bond market moving forward.
More Dollar Bond Deals Expected
Looking ahead, more dollar-denominated bond deals are anticipated. Kazakhstan is reportedly considering selling US dollar benchmark bonds for the first time since 2015, and Adani Group is planning to issue $1.5 billion in dollar bonds.
The Strategic Value of Dollar Bond Issuances
“In this environment, you want to engage with the investor base that provides liquidity and sponsorship,” said Trang Nguyen, global head of emerging-market credit strategy at BNP Paribas. “That’s what a dollar bond issue offers.”
Conclusion
As emerging markets rush to secure financing ahead of looming risks in the US economy and political sphere, they are leveraging the favorable conditions offered by dollar-denominated bonds. With uncertainty around interest rates, market volatility, and the upcoming US elections, borrowers are moving swiftly to ensure their financial stability in the months ahead.
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