Last year, the increasing likelihood of a rise in interest rates pushed a large number of emerging market sovereigns to finance their funding needs in the international bond markets. Thus far, that rate hike has not yet materialized, so bond experts expect the issuance trend to continue for the time being.
Over the last few weeks, several countries including Indonesia, The Philippines, Turkey, The Dominican Republic, Mexico and Colombia, have brought successful dollar-denominated bond issues to market. All of these issues were met enthusiastically by investors, and, for the issuers, priced at competitive levels. In fact, Colombia managed its tightest coupon yet with its $1.5 billion, 30-year bond.
“There is good appetite for sovereign issuance in hard currency from emerging markets and those deals that have been issued have performed very well,” said Arthur Hovespian, portfolio manager of the Payden Emerging Markets Bond Fund. “Going forward, there will be more issuance from sovereigns. You never can know the timing and the magnitude of the issuance, of course, but we expect it to continue and we believe appetite will remain strong.”
Investors have been keen on emerging market debt because of the higher yields it’s been offering. Colombia, for instance, offered 5% on its new 30-year bond, an amount that is not only attractive when compared to what developed market debt instruments are yielding, but also quite a coup from the issuer’s perspective, said Janelle Woodward, director of research at BMO TCH, which manages the BMO TCH Emerging Markets Bond fund.
“For Colombia to fund on the long end at those levels is quite something,” Woodward said. “Their debt has performed very well and this has been one of the strongest performing new issues.”
On the corporate side, too, emerging market issues have been strong performers. Companies like Kimberly-Clark de Mexico successfully sold $250 million in a 144A Reg S bond, without the explicit backing of its US parent, Woodward said, and Alfa, a large Mexican conglomerate, brought $1 billion worth of 10-year and 30-year bonds to the market last year.
But even as investors are aware of the yields on emerging market debt, the fall in oil prices and the geopolitical uncertainty surrounding Russia, in particular, have cast a pall on emerging markets debt and led some to pull back from the asset class, both on the sovereign as well as the corporate side. Many investors also have concerns that the higher value of the dollar will place pressure on the balance-of-payments in emerging market countries.