Macro Analysis /

EM sov issuance rose in September but annual rate heads for lowest since 2015

  • Sovereign issuance doubled, albeit from a low base, to US$6bn in September, although overall activity is still subdued

  • Total EM hard currency sovereign bond issuance stands at US$68bn ytd, less than half the amount seen a year ago

  • EM bonds had their worst month since the pandemic (-6.5% TR, -24% YTD) as the global rate shock continues to reverberate

EM sov issuance rose in September but annual rate heads for lowest since 2015
Stuart Culverhouse
Stuart Culverhouse

Chief Economist & Head of Fixed Income Research

Tellimer Research
3 October 2022
Published byTellimer Research

EM hard currency sovereign bond issuance doubled to US$6.1bn in September from the previous month, based on our calculations using data from Bond Radar. However, coming from just three issuers for the second month running and with no high yield (HY) issuance again (for the third month this year), activity remains paltry as the rising global rate environment continues to take its toll – we exclude the US$0.7bn equivalent issued by Slovenia over the month and China's CNY issuance from our definition. Indeed, the story is becoming a bit repetitive.

EM hard currency sovereign bond issuance by month*

It brings total EM hard currency sovereign bond issuance to US$67.6bn year-to-date, less than half (46%) of the amount seen in the same period last year. It means if issuance continues at this rate, it will reach cUS$90bn for the year, which we think would be the lowest since 2015.

In particular, we didn't see the typical seasonal rebound in issuance in September after the traditional summer lull. As we noted last month, we might have expected to see a pick-up in issuance in September, with pent-up supply, after a quiet July and August, providing market conditions turn more favourable. They didn't. On the contrary, issuance was down 75% from the same month last year.

Investment grade (IG) accounted for all issuance in September, from three issuers (Bulgaria, Indonesia, and Romania). Indeed, IG accounted for most of the issuance in Q3, around 95%. There was no HY issuance in September, following just US$0.5bn in August, and nothing in July. As a result, HY accounted for only 5% in Q3. There has been no meaningful HY issuance for some five months now, since April, with only US$1.3bn in total since then.

Year-to-date, IG accounts for 70% of issuance, while HY stands at 28% and crossover 2%.

Three-quarters of the year in, the biggest issuer has been Romania (US$8.5bn, 12.6% of the total), followed by Indonesia (12.2%), Mexico (10.8%), Chile (8.9%) and Turkey (7.4%).

Despite the relative dearth of issuance, one theme of the month was tender offers, with offers from Barbados, El Salvador, Indonesia and Slovenia (not included in our issuance figures). El Salvador closed a tender offer for its 2023 and 2025 global bonds, in another attempt to stave off default concerns, while Barbados completed a tender offer to buyback part of its 2029 global bond funded by another debt-for-ocean swap. Indonesia repurchased six global bonds with a total amount of US$325mn in a switch and tender offer as it seeks to extend its maturity profile and achieve cost savings.

In fact, EM sovereign bonds had their worst month of the year in September, and worst month since the pandemic, with a total return of -6.5% on the Bloomberg EM Sovereign USD index, beating the previous worst monthly performance in June and making for the seventh negative month this year. That said, most of the decline came in the last week of the month as the sell-off in USTs accelerated. US bond yields rose above 4% on the 10-year in intraday trading early on 28 September, their highest since 2008, although they have since eased, closing the month at 3.83% (which is still 64bps wider on the month, and 118bps since end-July). The 10-year yield has risen by 232bps this year.

It brings the total return for the overall index to -23.7% YTD, with HY (-22.0%) fractionally outperforming IG (-24.8%).

Monthly EM sovereign bond returns*

The yield on the Bloomberg EM Sovereign USD index rose 110bps in September (after an increase of only 13bps the previous month) to 8.74%; an increase of 389bps YTD. As a result, the index's spread widened 45bps on the month to 470bps, and is 133bps wider YTD.

The yield on the index's HY sub-component ended the month at 12.35%, a rise of 126bps on the month and 497bps higher this year (and only about 20bps off its post-Covid high of 12.6% in July), with a spread of 827bps (+57bps on the month and +231bps this year). The IG yield rose 92bps on the month to 5.47%, which is up 288bps this year, with a spread of 147bps (+31bps on the month and +40bps this year).

EM sovereign bond spreads (bps)

No wonder then that with so many countries priced out the market, with 27 countries having a yield of 10% or more, or being in default (nearly 40% of the index) – and 33 over 9% (45% of the index) – there has been so little issuance, and especially so little from HY.

The outlook for issuance, therefore, looks pretty bleak. Rising global rates, and rate volatility and the stronger dollar (DXY +17% YTD), will continue to pile more pressure on EM, especially more vulnerable frontier markets and smaller EM, and those with large external financing needs and limited policy space.