Fast reading
- Ivory Coast became the first sub-Saharan African country to re-issue in the eurobond market in January with a US$2.6bn two-tranche deal across a conventional and a sustainable bond.
- The Fed and the Bank of England held rates steady this week, as investors await further data on when central banks will begin cutting rates.
Emerging market debt issuance has made a strong start the year, with US$46.8bn of sovereign issuance in January1, as issuers rushed to take advantage of a drop in borrowing costs.
Ivory Coast became the first sub-Saharan African country to re-issue in the eurobond market in January with a US$2.6bn two-tranche deal across a conventional and a sustainable bond. Saudi Arabia, Mexico and Indonesia have also issued bonds this year.
Figure 1: EM sovereign issuance for the month of January (2005-2024)
The US Federal Reserve’s pivot towards the end of 2023 has boosted funding conditions with the US central bank expected to ease monetary policy faster than previously expected. Lower yields on US Treasuries have made the returns on emerging market assets more attractive.
“It’s encouraging to see risk appetite return,” says Mohammed Elmi, Senior Portfolio Manager for Emerging Markets Fixed Income at Federated Hermes.
“Over the past two years, investment grade issuers and mid beta high yield issuers enjoyed market access at elevated rates. Frontier sovereigns were locked out of the primary market; faced with the prospect of issuing at double digit yields, most chose to tap other funding sources such as Multilateral Development Banks and the syndicated loan market,” Elmi adds, adding that the Fed’s pivot changed this dynamic.
The flagship Bloomberg Emerging Markets USD Aggregate Bond Index has risen almost 10% since mid-October last year.
Figure 2: Bloomberg EM USD Aggregate Bond Index on the rise
Rate cuts awaited
While investors expect leading central banks to cut rates soon, both the Fed and the Bank of England (BoE) held rates steady this week, in common with the ECB last week.
The Fed kept its benchmark rate at 5.25%-5.5%; while the BoE held rates at 5.25%, as policymakers await further evidence that inflation is under control.
Fed Chair Jerome Powell pushed back against the idea that the bank could start reducing rates as early as March, while BoE Governor Andrew Bailey said there was a need for ‘more evidence’ that inflation was under control before implementing cuts.
“The Fed’s pause on interest rates was widely anticipated and investors had already started to accept that March cuts are unlikely,” Lewis Grant, Senior Portfolio Manager for Global Equities at Federated Hermes Limited.
“Powell’s clarity on the requirements for rate cuts may contain future over-eagerness from investors, although realistically the statements reflect a divergence of opinions within the Federal Open Market Committee group and there’s something in the outlook for bears and bulls alike. As such, it is earnings season, and potentially stimulus in China, that will set the direction for global markets.”
There’s something in the outlook for bears and bulls alike
The minutes of the BoE meeting, meanwhile, were ‘slightly dovish’, says Orla Garvey, Senior Portfolio Manager, Fixed Income. “The BoE press conference had a relatively balanced tone, nevertheless, we noted Governor Bailey’s comments around keeping the March meeting live. Currently, a rate cut in March is priced at 12%,” she says.
In markets, the yield on the two-year UK Gilt had dipped to 4.20% at 14:30 GMT on Thursday following the BoE’s decision to hold rates. The yield on the 10-year US Treasury had fallen to 3.83%2. Equities, meanwhile, continued their generally positive start to the year. The US blue-chip S&P 500 Index was up 1.89% YTD; the Euro Stoxx 50 Index was up 2.45% YTD. The UK FTSE 100, however, was down 1.53% YTD3.
For further insights on equities, please see our recent article on US SMID
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1 JP Morgan Global Emerging Markets Research 25 January 2024
2 Bloomberg as at 2 February 2024
3 Ibid.
