Emerging market governments will borrow $40 billion in January

Emerging market governments have borrowed more than $40 billion in global bond markets so far this year as easing global inflationary pressures and hopes of an economic recovery in China pave the way for January’s fastest-ever lending.

A sharp sell-off that swept global bonds last year, as major central banks responded to runaway inflation with sharp rate hikes, effectively shut many borrowers in developing countries out of bond markets for a long time. But money flowed into bonds again in the new year as further signs suggested inflation in the US and the euro zone may have peaked, with countries like Mexico, Hungary and Turkey embarking on large bond sales.

“Last year patience didn’t really pay off, the market just kept getting worse over time,” said Stefan Weiler, head of CEEMEA debt capital markets at JPMorgan. “That’s why a lot of sovereign borrowers jumped through that window as quickly as they could this year.”

Fourteen emerging-market sovereigns borrowed a total of $41 billion from early January through Thursday, according to data from Dealogic. That far outstrips the early days of any preceding January, which is typically a busy month for debt sales, according to Bank of America strategists — the only year with a larger amount raised throughout the month was 2021 at 48.7 Billion dollars.

The sell-off came as emerging market bond prices rebounded from severe 2022 losses. A JPMorgan gauge of emerging market foreign currency debt is up 1.7 percent so far in January after falling 17.8 percent last year. Investors have scaled back expectations of further rate hikes in the major developed markets, removing headwinds for emerging market debt.

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Traders are now betting that the Federal Reserve will hike interest rates by just a quarter of a point next month after US inflation fell to its lowest annual level in more than a year.

The reopening of China’s economy – a key engine of growth in the developing world – with the lifting of draconian Covid-19 restrictions has fueled optimism.

“The elimination of zero Covid policies happened much faster than most people expected,” said Uday Patnaik, head of emerging market debt at Legal & General Investment Management. “During [developed] Countries are expected to go into recession, if you look at the major emerging market economies the only forecast this year will be in recession is Russia.”

According to Patnaik, who participated in recent Israel, Turkey and Mexico bond sales, the issuance size also reflects demand from end investors warming to fixed income after last year’s bloodbath. He said: “We are seeing interest in new mandates in emerging markets, partly because the yields are so much higher. There is money that needs to be deployed and issuers are taking advantage of that.”

Still, a global slowdown could mean the current calm will not last, particularly for riskier emerging market debt, some analysts argue. That prospect has made borrowing in emerging markets all the more urgent this month, argues Cristian Maggio, head of portfolio strategy at TD Securities.

“Some issuers may have decided to frontload,” he said. “If we’re right that recessions are going to happen in several key economies, I don’t think market conditions will necessarily remain benign.”

https://www.ft.com/content/ab26195f-dd30-41dc-bea2-21a1c6fe67fe Emerging market governments will borrow $40 billion in January

Adam Bradshaw

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