There's No Denying That the $321 Billion Em Bond Mania is Going to Catch Everyone's Breath This Year

The sale of emerging-market bonds in hard currencies is expected to decelerate significantly in the second half of the year due to an array of political risks. After a highly active first half, the issuance of debt by government and corporate borrowers in developing markets hit $321 billion, marking the busiest start since 2021, according to Bloomberg data. However, projections from JPMorgan Chase & Co. and Bank of America Corp. indicate that issuance will slow down more than usual, as many borrowers have already met their funding needs earlier in the year.

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Political turmoil in countries ranging from France to Bolivia, along with the recent US debate clarifying the White House race, has heightened global volatility concerns. This uncertainty has led many emerging-market (EM) issuers to front-load their borrowing, thereby reducing the supply available for the rest of 2024. Alexander Karolev, head of bond syndicate for Central and Eastern Europe, Middle East, and Africa at JPMorgan, noted that around 80% of the 2024 funding needs have already been met, suggesting that the current issuance volumes are unsustainable.

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While it is typical for bond auctions to decrease in the latter half of the year, this year saw an unusually rapid start. Renewed market access for many frontier issuers and attractive yields fueled a 32% surge in sales compared to the first six months of 2023, the largest increase since 2017.

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Saudi Arabia emerged as the leading borrower, surpassing China with approximately $35 billion in deals. Debt issued by sub-Saharan African nations rose to $11 billion from zero in the latter half of 2023, and Brazil and Mexico recorded a combined $12 billion in dollar notes in January alone. Corporate debt issues also saw a significant increase, with euro and dollar debt issuance reaching $168 billion, up from $108 billion in 2023.

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Despite the vibrant market activity, returns have not seen a corresponding rise. EM dollar bonds have provided a 2.5% gain to holders so far this year, down from 3.4% the previous year. This dip in returns is attributed to rising yields due to lowered expectations for US rate cuts and political instability in countries like India and Mexico. The performance of EM dollar bonds is comparable to US high-yield corporate bonds, another risk asset, while Treasury returns remain negative.

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Looking ahead, the anticipated slowdown in bond sales could support prices as demand outstrips supply, helping maintain debt sustainability for issuers, according to Philip Fielding, co-head of emerging markets at MacKay Shields. He noted that less issuance creates scarcity in bond markets, which can boost prices as supply decreases relative to coupons and redemptions.

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JPMorgan, the second-largest arranger of EM bonds, predicts sovereign issuance in hard currencies to total $163 billion for the year, with corporate sales potentially exceeding $300 billion. So far, EM governments have raised $119 billion, and companies have borrowed $172 billion, based on Bloomberg data.

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The build-up to the US elections is expected to influence market appetite and the timing of bond sales. Jonathan Marshak, an emerging-market credit strategist at BNP Paribas SA, suggested that election-related volatility could impact the cost of funding across both EM and US markets. Adrian Guzzoni, head of debt capital markets for Latin America at Citigroup Inc., noted that August, typically a quiet month, might see increased activity as issuers seek to preempt election risks.

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Merveille Paja, a sovereign credit strategist for Eastern Europe, Middle East, and Africa at Bank of America, expects a more favorable issuance window post-election. She also indicated that the Federal Reserve's anticipated rate cut in December would further reduce borrowing costs. BofA forecasts $60 billion in sovereign sales for the rest of the year, primarily from countries like Mexico, Turkey, China, Indonesia, and the United Arab Emirates. BNP expects a strong return from China, with significant deals anticipated in the Philippines, South Africa, and Bulgaria.

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Morgan Stanley projects an additional $70 billion in sovereign bond sales, driven in part by expectations of early US monetary policy easing. They identified potential sellers including Hungary, Colombia, Angola, Morocco, Nigeria, Oman, and Rwanda.

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Nevertheless, increased volatility leading up to the US election could raise borrowing costs and widen spreads over safer debt, potentially pausing issuance, according to BNP's Marshak.

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