| LONDON, June 30
LONDON, June 30 Emerging market borrowers sold
over $260 billion worth of bonds in the first half of 2014,
outstripping year-ago levels despite geopolitical noise as
borrowers rushed to take advantage of lower-than-expected U.S.
The hard currency debt market was hampered by the
Ukraine-Russia conflict and a sharp fall in Russian bond sales.
But a 50-basis-point fall in U.S. 10-year yields, the benchmark
for most emerging debt, has more than made up for the
As a result, issuance has been robust, with analysts noting
that governments and companies have already completed two-thirds
of full-year forecast issuance.
By Friday, year-to-date bond sales were $268 billion, with
governments accounting for $67 billion and companies raising the
rest, according to data from Thomson Reuters. That compares with
year-ago issuance of $240 billion, of which governments had sold
$50 billion, the data shows.
"Issuance has been very strong and that reflects two things.
First, you have a strong underpinning of the market in terms of
demand because of investors' search for yield," said David
Hauner, head of head of EEMEA fixed income and economics at Bank
of America Merrill Lynch.
"Second, we have seen a front-loading of issuance because of
the consensus view that U.S. interest rates will rise."
U.S. yields, contrary to forecasts, have fallen this year to
2.5 percent from end-2013 levels of 3 percent because of
relatively weak U.S. data and a dovish Federal Reserve.
But the Fed is expected to start raising rates in the second
half of 2015, prodding bond sellers to rush to market before
borrowing costs rise.
BofA/Merrill estimates year-to-date bond sales at $258
billion while JPMorgan sees sovereign year-to-date issuance at
over $60 billion or two-thirds of full-year forecast levels.
Corporates have sold over $200 billion, JPM said.
Issuance figures often differ because of the way each
compiler defines emerging markets.
Despite the hefty issuance, emerging hard currency debt has
been one of the top performing asset classes of 2014, with
sovereign bonds returning over 9 percent.
But most banks predict Treasury yields will rise back to
around 3 percent by year-end or even higher, raising borrowing
costs globally, as the Fed winds down money-printing and signs
of economic recovery gather pace.
Another headwind could come from Argentina which could go
into technical default because of a long-running court case.
"The largest part of the rally is likely behind us," Hauner
RUSSIA, FRONTIERS, EURO
Russian companies are generally prolific bond issuers but
conflict in Ukraine and the threat of Western sanctions in
retaliation for Moscow annexing Crimea has effectively shut them
out of the market since end-February.
Russian bond sales total just $7 billion this year, Thomson
Reuters data shows, after over $25 billion in the first half of
2013. But with around $150 billion in debt repayments due in
2014, companies have started returning to the market, with
state-run Sberbank and Gazprombank selling bonds last week.
David Spegel, head of hard currency emerging debt at BNP
Paribas, said just $13 billion had been issued by CIS ex-Soviet
borrowers and estimated that the market closure had resulted in
$43 billion fewer new deals from the CIS.
"This shows the impact of the political crisis on the
ability of CIS names to originate debt in global capital
markets," said Spegel.
Russian borrowers, like many emerging peers, have been
turning to euro debt markets, where borrowing costs have been
pushed down by European Central Bank policy easing. Demand is
also strong from European funds, as the surge in yields for
weaker euro borrowers such as Spain and Portugal retreats.
Emerging issuers borrowed 42.1 billion euros ($57.4 billion)
or 21 percent of the total compared with 40 billion euros in the
whole of 2013.
The hunt for yield has also allowed lower-rated emerging
credits to tap markets. That includes serial defaulter Ecuador
which managed to raise $2 billion in June, and Pakistan, Sri
Lanka and Kenya.
While these high-yielding deals were heavily subscribed,
Spegel noted that overall only 26 percent of this year's
issuance was junk-rated compared to a historic 33 percent norm.
"This highlights the fact that although investors are hungry
for EM risk exposure, their speculative appetite is not as
robust," he added.
($1 = 0.7331 Euros)
(Additional reporting by Carolyn Cohn; Editing by Ruth