- Sovereign bond issuance eased to US$11bn last month, bringing total issuance to US$166bn YTD
- Year to date issuance now exceeds the whole of 2019, with two months to go
- But the primary market still hasn't been as active as we thought it might after the pandemic; HY especially has lagged
EM hard currency sovereign bond issuance eased to US$11bn in October, 40% below September, and 30% below the monthly average YTD. This brings total EM hard currency sovereign issuance to US$166bn YTD, based on our calculations using data from Bond Radar (note, our figures exclude the Argentina and Ecuador restructuring). The total is now nearly US$7bn (4%) more than the whole of 2019, and there are still two months to go.
Within overall issuance in October, Investment Grade (IG) accounted for just over half of issuance — US$6.2bn (55% of the total). High Yield (HY) was US$5.1bn (45%).
For the year so far, the relative issuance proportions have remained largely unchanged, with about 68% of issuance in IG and just over a quarter (28%) HY. Crossover/unrated accounts for the remaining 4%. These proportions have remained unchanged since the market reopened in April.
Within HY, there were just three issuers — Bahamas, Oman, and Turkey. The Turkey issue was its first since February, and first since the pandemic, with the US$2.5bn five year bond priced at a spread of some 300bps wider than its five year deal in February with a yield of 6.4%. Oman's dual tranche US$2bn issue was its first of the year, and together with a small tap from Sharjah last week (now rated IG), we reckon this brings total GCC issue this year to US$47bn (about 28% of the total YTD). But the HY highlight was undoubtedly Bahamas's US$600mn 12-year bond priced to yield 9.25% (see here). This was the second highest yield at issue this year, after El Salvador, but that was a 32 year at 9.5%.
Within IG, China launched a quadruple tranche US$6bn last month, its first issue since November 2019. Yields ranged from 0.4% for the shortest maturity (3 year) to 2.3% for the longest (30 year).
That issuance activity seemed quite slow during the month of October might be due to general market uncertainty and rising risk aversion from the pandemic in the wake of second wave concerns and ahead of this month's US presidential election (although we see a Biden victory as generally more favourable for EM — see here). Still the EMBIGD spread was 11bps lower on the month (closing at 421bps), although gains seen in the first half of the month were partially reversed in the second half.
But the primary market still hasn't been as active as we thought it might be, given the scale of post-pandemic financing needs, since it reopened in April. Even though total EM sovereign issuance already stands above the whole of 2019, we expected to see even more issuance, not least to take advantage of the zero-rate environment. Sovereign HY especially seems to have lagged, although a slower start was always likely given higher yields and weaker fundamentals coming out of the crisis. HY issuance YTD is US$47bn compared to US$59bn for the whole of 2019 (even more if one includes crossover). At the current run-rate, that would put total HY issuance on course for US$57bn this year — fractionally less than last year. While we also expect a record number of sovereign bond defaults this year (six countries on our count), at least in terms of recent history, and despite the shadow of DSSI for low income countries (which has been extended into next year, see here), many HY sovereigns — even those in the lowest rated B-bucket — have access to the market, and we are surprised they haven't taken more advantage of the market situation.
Also noteworthy, there still hasn’t been any issuance from SSA sovereigns since the pandemic, which makes it unclear to what extent lower-rated HY countries really do have access, or are simply unwilling to do so. If they are unable to rollover as eurobonds come due then that could be a big problem in future (though they still have time before the big post-2023 maturity wall arrives).
Of course, the other primary market highlight last month came from Developed Markets with the EU's pandemic-related bonds intended to finance its ambitious new regional recovery programme. The EUR17bn sale saw demand of more than EUR233bn according to the FT, reportedly the largest ever order book in global bond markets. The bonds were issued under its EUR100bn SURE loan programme ("Support to mitigate Unemployment Risks in an Emergency"). More supply will follow next year as the EU funds its EUR750bn coronavirus recovery package announced in July.
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