LONDON, March 31 Emerging market borrowers raised just over $100 billion worth of debt in the first quarter of 2014, slightly below year-ago levels as geopolitical noise and uncertainty over U.S. Federal Reserve plans dampened investor appetite.
Emerging sovereign and corporate issuers launched $106.2 billion in hard currency bonds between Jan. 1 and March 27, data compiled by Thomson Reuters shows, well below the $124.5 billion that was launched in the first quarter of 2013.
The shortfall was most pronounced in company debt, with issuance running at $67.5 billion, compared to just over $100 billion in the first three months of 2013.
An end of year rush took total debt sales for 2013 to a surprise $450 billion record. That was driven by borrowers racing to get their funding done before U.S. Treasury yields - on which most emerging debt is priced - rose any further.
The Fed has started cutting back on its monthly bond buying, and signs are the first rate rise could come in 2015, potentially pushing borrowing costs even higher.
The big obstacles for borrowers this year were military tensions between Russia and Ukraine, fears of default in the latter and Western sanctions on Russia.
"People have been holding back because of the Russian issue and as that subsides, the market will open up again. We should see a spike in issuance in the next two weeks," David Hauner, head of EEMEA fixed income strategy and economics at Bank of America Merrill Lynch, said.
BofA/Merrill estimates sovereigns raised $35.5 billion in bond markets by March 21 while companies sold bonds worth $79.3 billion. It predicts 2014 sovereign issuance at $100 billion.
Issuance figures often differ because of the way each compiler defines emerging markets.
"We will probably see a busy pipeline in coming weeks," Hauner said.
Azerbaijan debuted on bond markets this quarter, raising $1.25 billion. Other issuers included Hungary with a $3 billion bond, while Brazil's Petrobras sold $8.5 billion in multi-tranche bonds and Mexico came with a 100-year sterling issue.
Despite Fed worries, few expect emerging borrowers to face refinancing problems, as sovereigns such as Hungary and Turkey have already completed a third of projected 2014 issuance.
JPMorgan said in a note that companies had raised a fifth of the $294 billion they forecast for the entire year.
Also boosting the market, emerging dollar debt has returned 3.5 percent this year after 2013 losses of 6.6 percent. The gains are due to a 25-basis-point fall in underlying U.S. Treasury yields.
While most emerging bond issues have been well subscribed, data from EPFR Global shows emerging bond funds have shed $13 billion so far this year, almost equalling last year's outflows.
Jennifer Vail, head of fixed income at U.S. Bank Wealth Management said she expected emerging debt markets to stay volatile for a while, with risk-averse retail investors likely to stay on the sidelines until the Fed plans become clear.
"By May there should be some clarity on the U.S. economy's strength as we will start seeing data prints that don't have weather-related noise around them and more accurate projections on where the Fed will go from here," she said.
"I would imagine that the May time frame is the earliest we could see flows really coming back to EM (hard currency) debt."
One characteristic of this year's issuance is the popularity of non-dollar hard currency bonds. JPMorgan noted that non-dollar bonds accounted for 26 percent of year-to-date sales by mid-March, compared to 10-20 percent in recent years.
Recent examples were Mexico's 100-year sterling bond, a Swiss franc bond by Chile's Banco BICE and Brazil's 1-billion-euro issue. Brazil is mulling a yen bond and Santander Chile issued a "kangaroo bond", the first Australian dollar issue by a Latin American bank.
"Issuance in euro makes sense given the divergence in euro and U.S. yields," Hauner said. "Given the expectation of a weakening euro and a strengthening dollar in coming years it makes sense to issue in euros." (Additional reporting by Rosalba O'Brien in Santiago de Chile; Editing by Louise Ireland)