Macro Analysis /
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Emerging Market sovereign bond issuance rises in June, but more still to come

  • EM hard currency sovereign bond issuance rose to US$21bn in June, with Q2 issues of US$83bn more than double that in Q1

  • HY issuance continues, with 11 sovereigns accessing the market since it reopened, issuing US$20bn, but access is limited

  • Large crisis-related funding needs suggests much more issuance is on the way; the surprise is we haven't seen it yet

Emerging Market sovereign bond issuance rises in June, but more still to come
Stuart Culverhouse
Stuart Culverhouse

Chief Economist & Head of Fixed Income Research

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Tellimer Research
1 July 2020
Published byTellimer Research

EM hard currency sovereign bond issuance was US$20.8bn in June, a rise of 11% compared to May, bringing total issuance YTD to US$123.5bn, based on our calculations using data from Bond Radar. This implies Q2 issuance of US$83bn, slightly more than double that in Q1.

Within overall issuance in June, Investment Grade (IG) issuance was US$10.3bn (49% of the total) and High Yield (HY) was US$7.8bn (37%), up 17% and down 21%, respectively from the preceding month. Crossover issuance of US$2.7bn (13%) accounted for the remainder. For Q2 20 as a whole, nearly three quarters has been IG, nearly a quarter HY, and 3% crossover. IG accounts for 72% of EM sovereign issuance YTD.

Within HY, we saw issuance from five countries in June, and a diverse set at that, as issuance continues to go down the rating scale. Issuance came from Albania (B1/B+/-), Brazil (-/BB-/BB-), Belarus (-/B/B), Jordan (B1/B+/BB-) and Honduras (B1/BB-/-), but with the exception of Brazil, none of these have been regular issuers. The crossover issuance came from two countries – Croatia (Ba2/BBB-/BBB-) and Trinidad and Tobago (Ba1/BBB-/-). We think, since market access resumed for HY in April, Belarus has been the lowest rated issuer so far. However, issuance has yet to transcend into the B- rating category. Even more interesting perhaps, Honduras, which is eligible for temporary debt service relief on its official bilateral debt under the G20's Debt Service Suspension Initiative (DSSI), was able to issue, although that might be partly due to its slightly better rating (as high as BB–) than many of the other eligible countries.

This supports what we have said before, that the market is open for (good quality) HY issuers, although access has still been limited. So far, since the market reopened, we count just 11 HY sovereigns that have come to market for a total of US$20bn (13 if we include the two crossover issuers in June). HY issuance YTD has been US$32bn. But the number of issuers still seems a remarkably low subset of the number of possible HY, and frontier, issuers. And we still haven't seen any issuance from Sub-Saharan Africa. South Africa, however, and Ukraine, are in the pipeline.

That the international bond market is, or could be, open to some HY issuers as a source of new money may be an important message to global policy makers and EM sovereign debt managers as they assess funding options and navigate their way through this crisis. Large crisis-related funding needs suggest much more issuance could be on the way, and it may be a surprise that we haven't yet seen the wall of issuance we might have expected. For instance, the IMF's new WEO update for June projects a budget deficit for Emerging Markets and Developing Countries this year of 10.6% of GDP, and a deficit for low-income developing countries of 6.1% of GDP (which is probably around US$100bn).

HY issuance has been helped by the decline in overall EM borrowing costs. Yields on EM US$ bonds have recovered since the depths of the crisis, and are in touching distance of their post-GFC lows, driven by global policy stimulus and massive QE. Nominal EM yields are around 5.0%, on our measure, although the fall in US bond yields means that the country risk premium (EMBI spread) is wider now than it was at the beginning of the year. Our measure of frontier yields, proxied by the average yield on US$ bonds for a basket of B-rated or frontier sovereigns, has also recovered, but not to the same extent. We estimate frontier yields at around 8.2%, having peaked at 14% during the crisis. Our measure of the frontier premium (spread of frontier yield over EM yield) therefore stands at about 323bps, well down on the crisis peak of close to 700bps, and back to the level it was in November 2019.