Macro Analysis /

EM bond issuance's weakest start to year in five years as Russia invades Ukraine

  • EM hard currency sovereign bond issuance fell to just US$8bn in February, continuing the subdued start seen in January

  • Issuance stands at US$26bn YTD (Jan-Feb), the weakest start to the year for (at least) five years

  • Putin's invasion of Ukraine, and its global consequences, takes over from higher US bond yields as the key market driver

EM bond issuance's weakest start to year in five years as Russia invades Ukraine
Stuart Culverhouse
Stuart Culverhouse

Chief Economist & Head of Fixed Income Research

Tellimer Research
3 March 2022
Published byTellimer Research

Sovereign bond issuance in emerging markets continued its subdued start to the year last month. EM hard currency sovereign bond issuance was just US$8.3bn in February, from just four issuers, and marking a fall of 52% from January, based on our calculations using data from Bond Radar. This was likely as a result of the rise in US bond yields in the first half of the month (as the ten-year headed towards 2%) and the escalation of Russia-Ukraine tensions, and ultimately Putin's invasion of Ukraine, in the second half of the month, which led to a generalised increase in risk aversion and sell-off in EM bonds.

EM hard currency sovereign bond issuance by month*

Within overall issuance, the bulk came from High Yield (HY), which accounted for nearly 90% of the total, while investment grade (IG) was about 11%. This composition probably reflects a lag from the rise in US bond yields in the first part of the month, with HY issuers not having the luxury of waiting while IG issuers were able to bide their time. The only IG issuer, in our methodology, was Mexico and that came on 7 February, whereas there were three HY issuers; namely, Turkey, the Dominican Republic (both on 16 February), and Bolivia (23 February).

Moreover, taking cumulative issuance so far over the start of this year (issuance over January-February combined), issuance was just US$25.6bn (of which 65% has been in IG and 35% in HY). This is 46% down from last year and marks the lowest start to the year for issuance in (at least) five years, according to our calculations.

EM bond issues - weak start to the year

EM bonds had a challenging month last month, mainly due to Putin's invasion of Ukraine, with a total return on the Bloomberg EM Aggregate Index of -4.5% (albeit with most of the decline coming at the end of the month), and a YTD decline of 8.1% (to cob 2 March). The HY constituent has fared similarly poorly.

The yield on the Bloomberg EM Aggregate Index has risen to 5.8%, up 150bps YTD, which, barring the period during the onset of Covid in Spring 2020, is the highest level for three years (since early 2019). The spread on the index is 390bps. And the yield on the Bloomberg EM High Yield Index has risen to 8.8%, up 160bps YTD, with a spread of c700bps. The HY spread exceeds its most recent post-Covid peak at the end of 2021, and is back at the elevated level seen during most of the second half of 2019.

That said, the EM bonds most affected by the war in Ukraine have been in those countries which are closest to the epicentre of the crisis (eg Russia, Ukraine, Belarus) as well as high beta names and those under pre-existing distress and some commodity importers. And the war didn't deter Chile (one of the biggest sovereign EM issuers in recent years) from returning to the market again yesterday for the second time this year.

EM bond spreads (bp)

While market sentiment may be helped by a reappraisal of interest rate expectations, following fears over war-induced global stagflation, and as seen by US Fed Chair Powell's recent comments about future rate hikes which were perceived accommodatively (and US bond yields may also be supported by a possible flight to safety), Putin's war with Ukraine – and its global consequences – is likely to dominate EM sentiment for the foreseeable future amid elevated global risk aversion, at least until there is movement towards de-escalation, a cease-fire, and agreement on Russia troop and territorial withdrawal.

VIX volatility index