Macro Analysis /
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EM sovereign bond issuance in October was the second highest month this year

  • EM hard currency sovereign bond issuance surged to US$11bn in October, albeit this was mostly due to KSA

  • It brings total issuance to US$79bn ytd, still only half the amount seen in the same period last year

  • Challenging EM financing conditions saw yields rise to over 9% before easing, with the total return flat on the month

EM sovereign bond issuance in October was the second highest month this year
Stuart Culverhouse
Stuart Culverhouse

Chief Economist & Head of Fixed Income Research

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Tellimer Research
1 November 2022
Published byTellimer Research

EM hard currency sovereign bond issuance rose to US$11.0bn in October, nearly double the amount issued in September (an increase of c80%) and its highest amount since January (overtaking the previous second best month, which was March), based on our calculations using data from Bond Radar. However, issuance was higher still, at US$15.2bn compared to US$6.9bn in September, if we include Estonia, Latvia, Lithuania, Slovak Republic, and Slovenia, which we exclude from our definition of EM.

However, it is too soon to hang out the flags as issuance was still 15% below the same month last year as the twin shocks of war and rates continue to weigh on investor sentiment. Moreover, issuance was distorted by a US$5bn deal from Saudi Arabia (KSA), which accounted for nearly half the month's total issuance.

It brings total issuance to US$78.6bn year-to-date, which despite last month's surge, is still only half the amount seen in the same period last year. It means issuance will reach some US$94bn this year if it continues at this rate, which we think would be the lowest since 2015.

EM hard currency sovereign bond issuance by month*

Last month's issuance came from just four issuers, and within that the surge is distorted somewhat by a big Saudi deal, which accounted for 46% of the month's total.

Issuance was led by investment grade (IG) issuers, with three IG sovereign borrowers accounting for 77% of the total (Philippines' US$2bn triple tranche, Saudi Arabia's US$5bn dual tranche, and Uruguay's US$1.5bn single tranche). It also consisted of one high yield (HY) borrower (Turkey) – accounting for the remaining 23%. Turkey's issuance (albeit US$2.5bn) was the first in HY in some nine weeks, since Guatemala's at the beginning of August, although with only US$3.8bn issued since April (and most of that being Turkey last month), there has been little meaningful HY issuance for some six months now (and what we've had is from only four issuers).

As a result, IG continues to account for most issuance ytd, at 71% of the total, with HY 27% and crossover less than 2%.

Sub-par issuance is reflective of still challenging EM financing conditions, which saw average nominal EM sovereign dollar yields rise to a high of 9.25% on 21 October (+51bps on the month and +440bps this year), based on the Bloomberg EM Sovereign USD index; we think its highest rate in over 20 years outside the exceptional GFC/pandemic periods.

Yield on EM Sovereign bonds (%)

The rise in EM yields was due to higher US bond yields, with the 10-year rising to a high of 4.24% last month. However, markets rallied in the last week of the month, with the 10yr UST closing at 4.05%, such that the nominal EM yield narrowed to (a still high) 8.81% by month-end (only 7bps wide on the month although +396bps ytd).

Within the index, the yield on the IG constituent closed the month at 5.66% (+19bps; +306bps ytd), having reached close to 6%, while the yield on the HY constituent finished the month at 12.15% (-20bps; +477bps ytd).

As a result, EM sovereign bonds were flat on the month in a total returns sense (+0.2% on the Bloomberg EM Sovereign USD index, although it could have been much worse), only the third positive month this year, and after a dire September (-6.5%), with HY (+1.9%) outperforming IG (-1.2%). The total return on the index is -23.6% ytd, with HY (-20.5%) slightly outperforming IG (-25.7%).

Monthly EM sovereign bond returns*

In spread terms, the Bloomberg EM Sovereign USD index actually fell 17bps on the month to 453bps (+116bps ytd). The spread on the IG constituent narrowed by 7bps on the month to 140bps (+33bps ytd) while the HY constituent saw its spread fall by 44bps to 783bps (+187bps ytd).

EM sovereign bond spreads (bps)

The issuance outlook for the rest of the year is therefore uncertain. Yields remain high, even if spread action has been more contained, which may deter some issuers, or at least encourage them to wait, if they can afford to do so, amid continuing uncertainty about the global rate outlook and amid greater volatility in rates. However, others may want to take advantage of a window of opportunity of the recent rally, if it continues (post this week's FOMC), to either finish this year's funding needs, or get a start on pre-funding next year.

That said, some 40% of the index by country cannot issue anyway, with many smaller EM and frontier markets locked out of the market and facing double digit yields, as the rising global rate environment continues to put pressure on EM.