Volatility fears are driving $28 billion of debt in emerging markets

(Bloomberg) — Borrowers in the developing world are bracing themselves against volatility that could roil their biggest U.S. markets and derail their refinancing plans.

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In the first five days of the month alone, they sold more bonds than at the beginning of any previous September. Issuances by governments and companies reached $28 billion as of Friday, according to data compiled by Bloomberg. During the same period last year, $12 billion worth of deals were completed.

Many issuers are trying to get ahead of the U.S. presidential vote in November and another growth scare similar to Aug. 5, when panicked investors fled everything from emerging-market currencies to Japanese stocks. It fueled the longest rise in borrowing costs for emerging-market sovereign borrowers in about six years, according to a JPMorgan index.

“Most issuers have chosen very well to come to the market ahead of potential volatility,” said Alexander Karolev, head of JPMorgan Chase & Co.’s CEEMEA syndicated bond desk. “You will now see a significant drop in emission volumes in the coming weeks due to risk events.”

For now, issuers are still enjoying some of the lowest yields in two years, at an average of 6.5 percent, according to a Bloomberg index of government and corporate dollar debt, giving them a clear lead in primary markets.

As they anticipate borrowing plans, investors were ready to oblige before interest rate cuts cut yields further. Abu Dhabi National Oil Co., Indonesia and Uruguay were the week’s top deals.

Calls for aggressive easing from the Federal Reserve when it meets later this month are growing stronger as data paint a mixed picture of the US economy. Friday’s payrolls report showed that job growth came in below expectations. A measure of US rate volatility suggests turbulence is expected.

“Obviously, a big slowdown is bad for emerging markets,” said Nick Eisinger, co-head of active fixed income emerging markets at Vanguard Asset Services Ltd. “Now is a good time to go into issuance.”

The dollar is the favorite currency option for hedging volatility due to its size and ease of trading, and trades in the US currency have become even more popular this year, outperforming those in the euro and other strong currencies by an increasing margin.

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This week, transactions denominated in US dollars accounted for 86% of sales, compared to an average of 78% in 2023. For emerging market issuers, this makes navigating the upheavals in the US economy and political sphere that much more difficult. more important.

“Issuers will be wary of the US election around the corner and the risk that if US growth concerns increase, spreads could widen a lot,” said Aviva Investors analyst Carmen Altenkirch. “The beginning of August was a reminder to everyone how fickle the market can be.”

Sales of dollar-denominated bonds by emerging market governments and companies rose 54 percent this year to $349 billion, according to data compiled by Bloomberg. This marks the biggest year-on-year increase in dollar-denominated bond sales since 2012. Euro-denominated bonds rose 26% to €64 billion, while sales in the Japanese yen, Swiss franc and pound British totaled 9 billion dollars.

The dollar provides “deep liquidity, which allows you to carry out large-scale loan transactions on favorable terms,” ​​Kaspars Abolins, who heads Latvia’s Treasury department, said in emailed comments. Abolins said he expected the government to be a regular issuer of dollar bonds after the nation raised $1.25 billion in May, its first foray into the U.S. currency in more than a decade.

More dollar deals are in the works. Kazakhstan is considering selling benchmark bonds in the US currency for the first time since 2015, with Adani Group planning $1.5 billion in bonds.

“This is an environment where you want to take advantage of the investor base that provides you with the sponsorship, the liquidity,” said Trang Nguyen, global head of emerging market credit strategy at BNP Paribas. “That’s what a dollar bond issue does for you.”

WHAT’S NEXT

• China will announce a set of data – consumer prices, industrial production, retail sales and credit growth. Trade data is likely to show that exports are slowing, while credit data will likely add to evidence that the recovery is struggling

• India will also announce consumer price data for August and industrial production for July

• Pakistan’s central bank is expected to cut interest rates by 100 basis points, pushing it against buoyant real interest rates that are squeezing the economy.

• In Latin America, Brazil is due to announce Q2 GDP on Tuesday; Chile’s central bank will hold its monetary policy meeting on the same day

• In Russia, the central bank is likely to keep rates on hold in September and maintain a dovish stance after a 200 basis point hike in the previous meeting on Wednesday.

–With assistance from Aaron Eglitis.

(Add size of Latvian bond sale in 13th paragraph)

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