Emerging debt issuance hits H1 record despite June drought-banks
LONDON, June 28
LONDON, June 28 (Reuters) - International emerging debt issuance experienced a barren month in June but still topped last year's record levels in the first half, helped by high numbers of corporate bonds, according to data compiled by banks.
Issuance has tailed off dramatically since May 22, when Federal Reserve Chairman Ben Bernanke indicated the Fed would reduce its bond-buying programme, which had driven investors towards higher-yielding assets.
U.S. Treasury yields have risen sharply since then, reducing the appeal of emerging bond yields to investors.
But low interest rates in the first few months of the year, coupled with the difficulties companies have had in borrowing money from increasingly-regulated banks, brought many emerging market borrowers to the international debt markets.
"We had a lot of issuance in Q1, especially from corporates, then everything dried up in May and June," said David Hauner, head of EEMEA fixed income strategy at BofA-Merrill Lynch Global Research.
"Now it all depends on how the rates market develops."
BofA-ML calculates record levels of corporate debt of $190 billion were issued in the first six months, up 50 percent on a year ago, with corporate and sovereign issuance together totalling $231 billion, compared with $172 billion in the same period in 2012. Last year was also a record for emerging debt issuance.
ING reckons $260 billion in international emerging market bonds were launched this year, compared with $196 billion in the first half of 2012.
But while January-May 2013 saw 50-125 deals a month launched, with monthly volume of $30-60 billion, according to Thomson Reuters data, a paltry 16 deals totalling $3.7 billion were issued in the first three weeks of June.
That level of issuance was little more than a tenth of borrowing seen in June 2012.
Investors have lost their enthusiasm for emerging market debt following the Fed comments and worries about China's economy and interbank funding.
Emerging hard currency bonds have posted negative returns of up to 7.5 percent, and spreads have widened by around 100 basis points over rising U.S. Treasury yields in the past month, though there has been some recovery in the past few days.
Emerging market bond funds, including local currency funds, saw record outflows of $5.57 billion in the past week, according to EPFR data cited by banks.
"The hot money ... is extremely price- and returns-elastic, it flows out when performance turns negative," Alex Garrard, partner at BTG Pactual, told an Emerging Markets Traders Association forum this week.
Garrard added that the outflows would stop only "when our asset class stops cratering and widening - it requires the 10-year U.S. Treasury note to stop travelling."
U.S. 10-year Treasury yields have risen around 50 bps in the past few weeks, to 2.5 percent.