* January record on course to be broken
* Dollar bond index up
* Local currency bonds and FX in the doldrums
By Sudip Roy
LONDON, Jan 23 (IFR) - Emerging markets bond issuance has
got off to a roaring start with supply for the month on course
to beat last January's new year spree.
About USD51.8bn had been issued in the international market
up to January 21, according to Thomson Reuters, a 55% increase
on the amount raised over the same period in 2013, and just
USD10bn less than the volume issued for the full month of
January. That record should be smashed in the coming days.
"Spreads are in, new issue premiums are negligible, it's the
perfect storm," said one banker in London. "Who knows how long
it's going to last."
Asia leads the way, accounting for roughly half of this
year's volumes. While sovereigns, such as Indonesia, Sri Lanka
and the Philippines have sold the big deals, the main theme, as
last year, is the slew of property companies hitting the market.
The supply has not surprised bankers, who say that many
Chinese developers have maturities coming up this year, and with
local rates higher, it makes sense for them to tap the offshore
However, some stresses are beginning to show in the property
sector. Powerlong Real Estate Holdings earlier this week became
the first emerging markets issuer to postpone a new issue this
year, delaying an offshore renminbi transaction.
The developer did not give a reason, though rival bankers
attributed the postponement mostly to some investors asking for
There then followed a generous new dollar bond from Wanda
Properties that dragged the rest of the sector down. "The
property sector is fragile and is vulnerable, and Wanda's deal
has just repriced the sector," said a high-yield trader.
Still, those concerns aside, most emerging markets new
issues have gone smoothly, with Turkey's USD2.5bn 10-year
transaction on Wednesday in particular seen as an encouraging
sign of its market access given the political problems in the
Another encouraging sign, and in contrast to the beginning
of last year, is that secondary performance is holding steady,
with emerging markets dollar-denominated bonds up nearly 1%,
according to JP Morgan's EMBI index.
That positive number will provide a fillip to investors
after a disastrous 2013, when many were nursing losses of 6% or
more. Indeed, all emerging markets sub-asset classes performed
terribly last year, but since the beginning of this year hard
currency sovereign debt has become more resilient.
In contrast, emerging markets FX and local currency bonds
remain in the doldrums, with returns on indices for both in
negative territory, driven by dollar strength and exacerbated by
worries about slowing economies and growing political risks in
In Turkey, for example, the lira has fallen to a record low
even after the successful bond sale as a corruption probe has
ramped up political tensions. With the lira extending losses
against the US dollar, Turkey's central bank has made its first
direct intervention in the FX market for two years, selling
around USD2bn-USD2.5bn of its reserves - more or less the amount
it raised through the bond sale.
The hard currency surge, however, is being driven more by
technical factors. With the Fed's tapering programme under way,
investors feel more comfortable putting their cash to work,
which still remains plentiful despite bond outflows from
emerging market funds over past year.
Although there were USD11.1bn of redemptions from hard
currency funds last year, according to EPFR Global, this is more
than offset by the amount of incoming money from amortizations
and coupon payments on outstanding bonds.
"EM hard currency bond investors have continued to be net
receivers of capital, which in turn explains the large demand
for new issuance," said Regis Chatellier, emerging markets
senior credit strategist at Societe Generale.
Investors, though, remain cautious about the medium-term
prospects of both hard currency and local currency debt.
"After the underperformance of the asset class in the second
half of last year, both emerging market US dollar-denominated
sovereign and corporate bonds are beginning to look attractive
relative to developed market corporates," said Benjamin Brodsky,
head of fixed income asset allocation at BlackRock.
"But emerging markets, especially local bonds and
currencies, will remain volatile and ultimately differentiation
will drive return opportunities."
(Reporting by Sudip Roy; Editing by Julian Baker)