Macro Analysis /

EM sovereign bond issuance rose 11% in May but activity is still subdued

  • Sovereign issuance rose 11% in May to US$7.4bn, although that shouldn't detract from still subdued levels of activity

  • It brings total EM hard currency sovereign bond issuance to US$50bn ytd, 60% of what it was in the same period last year

  • Twin shocks of war and rates continue to weigh on issuance, although end-month rally may open up a window for some

EM sovereign bond issuance rose 11% in May but activity is still subdued
Stuart Culverhouse
Stuart Culverhouse

Head of Sovereign & Fixed Income Research

Tellimer Research
2 June 2022
Published by

EM hard currency sovereign bond issuance was US$7.4bn in May, based on our calculations using data from Bond Radar, a rise of 10.7% from the previous month, as the twin external shocks of war and rates continued to weigh on the primary market. Thus, the subdued start to the year continued.

It brings total issuance year to date to US$50.2bn. More tellingly, cumulative issuance ytd is running at 40% below the first five months of last year and is 50% below the same period of 2020 (which encompassed the period when the market shut due to Covid).

EM hard currency sovereign bond issuance by month*

Significantly, all issuance in May was in investment grade (IG), across just four issuers (Poland, Romania, Indonesia and Abu Dhabi), in contrast to the previous month when IG almost ground to a halt, and what issuance there was all came on or after 18 May. This marked the first issuance – of any kind – since Croatia on 13 April; ie the market was effectively shut for five weeks from mid-April to mid-May.

There was no high yield (HY) issuance in the month, for the first time since December, likely as yields for weaker sovereigns became more prohibitive as average EM yields themselves hit 7% (see here and here). Indeed, excluding Croatia's crossover issuance, there has been no HY issuance for some seven weeks, since South Africa and Angola on 11 and 7 April respectively.

As a result, HY issuance ytd amounts to US$17.4bn, about 60% of that seen in the same period of last year. And by coincidence, there was no HY issuance in May 2021 either.

IG therefore continues to account for most issuance ytd, at 63% of the total, with HY 35% and crossover 3%.

Moreover, the pipeline looks pretty sparse. Indonesia priced another issue again (Samurai deal) on 1 June, while Kenya's on-off eurobond sale may be back on, with plans to issue by the end of June. Nigeria may also issue this month. Morocco and Uruguay may issue later this year. However, Cote d'Ivoire said last month that it had postponed a planned eurobond sale due to market conditions.

EM bonds however had a fractionally better month in May, staging a bit of a recovery towards the end of the month, perhaps as inflation fears were surpassed by global growth (recession) fears. This saw the US 10yr bond yield narrow from a peak of 3.13% on 6 May to 2.74% by 27 May – a striking 39bps fall (it has, predictably, widened back to 2.94% now). The monthly return on the Bloomberg EM Aggregate Index was flat, breaking four consecutive months of negative returns, and outperforming HY (-0.9%). It brings the total return ytd to -13.2% on the aggregate index and -11.1% on the HY index.

Meanwhile, the yield on the Bloomberg EM Aggregate Index ended May essentially unchanged (+2bps) at about 6.3%, although this masks the rise to 6.6% by the middle of the month, before its subsequent recovery. The spread rose by 8bps over the month to 346bps, for an increase of 49bps ytd.

The yield on the Bloomberg HY constituent however rose 17bps in May to 9.67%, although it peaked at 10.1% by the middle of the month, before its subsequent recovery. The spread rose by 24bps over the month to 682bps, for an increase of 86bps ytd, having reached 724bps on 20 May.

Moreover, after spreads returned to their pre-war levels by April, they have since widened again, by 50bps on the EM Aggregate Index and by 100bps on the HY index, as the impact of the war and inflation fears took over from the initial shock.

That said, some of the bonds that had sold-off the most, led by HY, have also staged the strongest recovery. Hence, the recent rally that came late in the month, if sustained, could open up an issuance window for some.

EM bond spreads (bps)