September 28, 2012 / 2:40 PM / 5 years ago

Emerging bond issuance set to top $300 bln in 2012

By Sujata Rao and Carolyn Cohn

LONDON, Sept 27 (Reuters) - Investor appetite for yield has fuelled record bond issuance by emerging market borrowers, and the 2012 total is set to top $300 billion helped by some players pre-financing next year’s needs.

Bond markets are benefiting from two major initiatives announced over the summer to boost economic growth in Europe and the United States.

Firstly, the European Central Bank said it will “do what it takes” to save the euro zone and then the U.S. Federal Reserve announced a $40 billion per month stimulus programme.

Those moves underpinned government bond yields in developed markets, with many near record lows. Emerging market debt has drawn huge inflows this year because of those ultra-low yields in some developed markets and high risks in others.

“Two percent yields on your (German) Bunds or U.S. Treasuries does not cut it. People have money to invest in high-yield markets,” said David Dowsett, senior portfolio manager at Blue Bay Asset Management.

“There is global demand for credit given low risk-free interest rates and the diminishing number of risk-free countries,” he said.

All that has boosted issuance in dollars and euros in the third quarter to around $94 billion, bringing the year-to-date total to $291 billion by Sept. 27, according to data from Bank of America/Merrill Lynch.

That beat the previous full-year record - $290 billion in 2010 - and saw BofA/ML lift its 2012 forecast to $314 billion from $293 billion.

“We are in a very credit-friendly environment,” said David Hauner, head of EEMEA fixed income strategy at BofA/Merrill Lynch Global Research.

“Growth is high enough for debtors to pay their bills but low enough to maintain extremely low interest rates and keep investors doubtful of equities. So, it is a perfect world for credit.”

Marc Balston, emerging debt strategist at Deutsche Bank, said sovereign issuance - $67.6 billion so far - would set a new record as countries pre-finance 2013 borrowing needs.


Emerging debt funds have lured flows of over $21 billion this year, according to Boston-based fund tracker EPFR Global, of which more than $16 billion has gone to dollar debt.

JP Morgan, which compiles the most widely used emerging debt indices and tracks a wider investor set, puts inflows at $50 billion this year, compared with a 2011 total of $43 billion.

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Issuance is running 25 percent above year-ago levels, driven by the appeal of higher-yielding debt in a world where safe-haven bonds from Germany and United States bear tiny or even negative yields, while other countries in the once-safe euro zone carry lower debt ratings than many emerging economies.

In the Middle East, cash-rich investors have driven a boom in Islamic bond, or sukuk, sales, encouraging Turkey to foray into the market for the first time.

Demand has been such that recent sukuks have generally been more tightly priced than conventional bonds.


A continuing feature is the surge in corporate issuance, which accounts for three quarters of this year’s total. A second aspect is the demand for lower-rated sovereigns, many of which have successfully tapped markets or are preparing to do so.

JP Morgan earlier this month upped 2012 corporate issuance forecasts to a record $255 billion.

Investors are finding corporate and frontier bonds attractive because spreads for more traditional emerging borrowers have tightened sharply over U.S. Treasuries.

Spreads on JPMorgan’s benchmark EMBI Global index are at the psychologically key 3.00 percentage points level 11EML, having fallen more than 1.20 points this year. Names such as Brazil or Russia offer even smaller premiums to U.S. Treasuries.

JP Morgan sees the index ending the year at 2.75 points.

“Credit spreads in high-quality sovereigns have compressed to levels which hardly leave room to compensate for risks,” Barclays Capital strategist Andreas Kolbe said.

He suggested moving down the risk spectrum to buy slightly higher-yielding sovereigns such as Croatia and Romana, as well as low-investment grade corporates.

Even troubled sovereigns such as Ukraine have managed to issue debt, while Zambia’s $750 million debut bond attracted bids 15 times that level. Frontier borrowers Bangladesh, Costa Rica and Morocco are among those expected to issue this year.


There have also been reminders that emerging debt does not come without risks. Ivory Coast debt has enjoyed a huge rally this year due to the resumption of coupon payments following a 2011 default, but the West African borrower has yet to make three missed payments.

In the Caribbean, Belize is in the midst of a debt restructuring and analysts said initial proposals have not been well received.

Others may follow Belize’s lead, said Stuart Culverhouse, chief economist at frontier markets broker Exotix.

He told a conference on Friday: “There are implications for other Caribbean sovereigns -- low growth in Jamaica, Grenada, Barbados may encourage these countries to take a similar approach to their own debt.”

(Editing by Dan Lalor)

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