Emerging market governments have raised more than $40 billion in international bond markets so far this year, as easing global inflationary pressures and hopes of an economic recovery in China paved the way for the fastest January borrowing spree on record.
The painful sell-off that engulfed global fixed income last year, as major central banks responded to runaway inflation by sharply raising interest rates, has kept many borrowers in the developing world out of bond markets for extended periods. But money returned to bonds in the new year amid other signs that inflation may have peaked in the United States and the eurozone, with countries such as Mexico, Hungary and Turkey launching large bond sales.
“Last year, patience didn’t really pay off, and the market continued to deteriorate as it went,” said Stefan Wheeler, head of debt capital markets for Central and Eastern Europe, Middle East and Africa at JPMorgan. “So, this year, many sovereign borrowers have jumped through that window of opportunity as quickly as they can.”
Fourteen emerging market sovereign borrowers raised a total of $41 billion from the beginning of January through Thursday, according to data from Dealogic. That far outweighs the early days of any January, usually a busy month for debt sales, according to Bank of America strategists — the only year in which more was raised over the entire month was 2021 at $48.7 billion.
The wave of sales came as emerging market bond prices rebounded from heavy 2022 losses. JPMorgan’s measure of emerging market foreign currency debt is up 1.7 percent so far in January, after falling 17.8 percent last year. Investors backtracked on their expectations of further interest rate hikes in major advanced economies, removing headwinds for emerging market debt.
Traders are now betting that the Fed will now raise rates by just a quarter of a percentage point next month after US inflation fell to its lowest annual pace in more than a year.
The reopening of the Chinese economy – a critical driver of growth in the developing world – while lifting tough Covid-19 restrictions has added to the sense of optimism.
“Revocation of zero-Covid policies happened much faster than most people expected,” said Uday Patnaik, head of emerging market debt at Legal & General Investment Management. “While [developed] Countries are expected to go into recession, if you look at the large emerging market economies, the only one expected to be in recession this year is Russia.”
The size of the issue also reflects demand from end investors moving toward 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 entering emerging markets in part because the yields are much higher. There is money that needs to be worked on, and issuers are benefiting from that.”
However, some analysts believe that the global downturn may mean that the current calm will not last, especially for emerging high-risk debt. That prospect made this month’s emerging market borrowing rush even more urgent, says Christian Maggio, head of portfolio strategy at TD Securities.
“Maybe some card issuers decided to front-load,” he said. “If we are right that there will be recessions in several major economies, I don’t think market conditions will remain necessarily benign.”