A $20 Billion Week Marks the Reopening of the Market for EM Borrowers

Emerging-market borrowers are reentering global bond markets, selling approximately $20 billion in dollar notes within a few days, recognizing that this opportunity may be fleeting. Countries like Colombia, Indonesia, and various developing-nation companies are rushing to secure lower borrowing costs, seizing a momentary easing of conditions amid indications that the Federal Reserve might be nearing the conclusion of its aggressive interest rate hikes.

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The drop in US Treasury yields from a 16-year high, influenced by both the potential conclusion of rate hikes and a slowdown in jobs growth in the largest economy, has enabled several deals that were on hold to proceed.

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This surge in activity may mark the beginning of a new wave of issuance for developing-nation borrowers, with several sales, including Brazil's long-awaited entry into ESG markets, still in the pipeline. According to Jean-Charles Sambor, head of emerging markets fixed income at BNP Paribas Asset Management, this development is positive for both issuers and portfolio managers, alleviating the risk of additional outflows from emerging markets or a rise in defaults.

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Governments such as Costa Rica, Indonesia, and Bulgaria, along with companies like Colombia’s Grupo Energia Bogota and Korea National Oil Corp, issued hard-currency bonds in the week ending Nov. 10. Spearheaded by Colombia and Turkey, each selling $2.5 billion of dollar debt, the total deal size reached about $20 billion, making it the largest for any week this year since February.

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The improved mood in the market, driven by the drop in US yields, has prompted more issuers to come to market, not only in developing nations but also in the US junk bond primary market, which has seen an influx of new supply after a slow October.

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Investors, holding extra cash due to a prolonged period of suppressed risk appetite, are now looking to deploy these funds, making it possible to absorb any issuance despite net negative flows from the asset class, according to Thys Louw, portfolio manager at Ninety One.

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Colombia's recent $2.5 billion sale of its first ethically-labeled bonds received significant demand, with orders reaching $11 billion, over four times the deal size. Turkey also tapped the dollar market for the first time since April, selling $2.5 billion of five-year Islamic notes with strong demand.

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Despite this recent surge, several deals are still in the pipeline, including Brazil's highly anticipated sale of environmental and socially responsible bonds. The ongoing improvement in US Treasury rates could lead to more issuances, even from smaller and frontier markets facing difficulties tapping into the international market.

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Rajeev De Mello, a global macro portfolio manager at GAMA Asset Management, suggests that the current window for issuers is wide open, and for those with maturities in the next 12 months, it is advisable to lock in attractive spreads and capture investor demand now.