Bad start but bonds comfort emerging markets

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Bloomberg

An employee counts out Turkish lira banknotes at a currency exchange office in Istanbul. The currency has stabilised since the Turkish central bank hiked rates two weeks ago, and the government sold $1.5bn of its longest-dated dollar bonds on Wednesday. Photo: Bloomberg

New York - Bonds are proving a salve for emerging markets after the worst start to a year in the currencies and stocks of developing nations since 2010.

Two weeks after emergency measures by Turkey’s central bank pulled the lira back from a record low, the government sold $1.5 billion (R16bn) of 31-year dollar bonds on Wednesday in its longest-dated debt in the currency ever. Russia issued 20 billion roubles (R6.3bn) of notes after back-to-back flops, while Slovenia a day earlier sold its first dollar-denominated notes since the nation’s banking industry was overhauled last year.

The access to capital is giving investors comfort that the worst of the rout may be over even as concerns linger that slowing growth in China and a pullback in US monetary stimulus will sap economies from South Africa to Russia. Developing-country governments have already raised enough dollars to cover more than a third of their financing needs this year, bolstering their ability to weather the market volatility.

“I can’t tell you how many times in the last couple years I’ve seen, ‘It’s the end of emerging markets’,” Katia Bouazza, the co-head of global capital markets for the Americas at HSBC Holdings, said. “We have to ride the market volatility but we have to look closer at fundamentals. To somebody looking at this market, do not be discouraged.”

The extra yield investors demand to hold dollar-denominated emerging-market government bonds instead of US treasuries fell to 334 basis points, or 3.34 percentage points, on Wednesday after reaching a seven-month high of 366 basis points on February 3, according to JPMorgan Chase’s EMBI global diversified index.

Gains of 1.2 percent this month have erased losses this year that had ballooned to as much as 0.7 percent at the height of the turmoil, the index data show. Bonds denominated in local currencies have declined 3 percent so far this year after dropping as much as 5.1 percent by February 3.

The healing in debt markets coincided with a second day of gains for MSCI’s emerging-markets stocks index, which erased a loss for the year as China’s exports rose more than analysts forecast. A Bloomberg gauge of the 20 most-traded currencies rose to a three-week high on Wednesday.

The International Monetary Fund kept its growth forecast for developing countries at 5.1 percent on January 21, while raising the outlook for advanced economies to 2.2 percent, from the 2 percent estimated last October. That would mark the narrowest growth difference between the two since 2001.

Developing countries including Slovenia, Indonesia and Mexico have raised $33bn in dollar debt this year through Tuesday, the most for the same period since 1999. That represents 38 percent of the funding Morgan Stanley estimates they need this year for interest and principal payments on their debt.

“This will be a bumpy year, and people will just pick and choose their windows,” said Ajata Mediratta at Greylock Capital Management.

Relative yields on corporate bonds from the most creditworthy to the riskiest borrowers fell to 184 basis points on Wednesday after reaching an almost two-month high of 193 basis points on February 4, according to the Bank of America Merrill Lynch Global Corporate & High Yield index. They have increased from a six-year low of 177 basis points on January 22.

Turkey is coming back to the market after the central bank boosted its three main interest rates at a midnight emergency meeting on January 28, raising the one-week repurchase rate to 10 percent from 4.5 percent. The lira strengthened for a third day on Wednesday, while the nation’s cost to borrow in dollars fell to a two-month low of 5.73 percent on Tuesday.

The country’s assets have been under pressure this year as it struggles to attract capital to finance its current account deficit while the government fights allegations of graft. Standard & Poor’s lowered its outlook on its BB+ credit rating to “negative” last week.

Wednesday’s bond sale, together with a $2.5bn 10-year note issuance in January, helped Turkey raise enough cash to meet two-thirds of its debt obligations this year, said Roberto Sanchez-Dahl of Manulife Asset Management. “That they’re able to come to the market today gives some comfort that the crisis is not going to expand.”

Slovenia raised $3.5bn in its debt offering on Tuesday. Yields on its bonds due in 2022 approached a low for the year, declining to 5.1 percent as the government started cleaning up the banking system. In Russia, the Finance Ministry issued 10 billion rouble bonds due in 2023 at 8.06 percent, compared with 8.39 percent on January 31.

“There’s too much pessimism over emerging markets,” said Geoff Lewis of JP Morgan Asset Management. “It’s been an overreaction.” – Bloomberg


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