LONDON (Reuters) – The coronavirus vaccine euphoria sweeping world markets is fuelling a mad dash into developing world debt that is shattering all previous boundaries and records, and shows no sign of slowing.
Vaccine breakthroughs, the U.S. election result and the $15 trillion pile of mostly developed world negative-yielding debt means that almost anything with an interest rate still visible to the naked eye is being hoovered up.
As a result Laos, a country with one of the lowest credit ratings possible, has been able to get away a benchmark bond this week. Peru, which recently went through three presidents in little over a week, has also sold a 100-year bond.
China and South Korea have issued their first negative-yielding government bonds – proving that it is no longer only Europe and Japan where investors pay, rather than get paid, to lend.
“Is it obviously crazy,” said Riccardo Grassi at Swiss-based fund Mangart, which mostly specialises in distressed and other types of riskier debt.
“It gives you an idea how much investors are trying to extract even minimal gains out of the huge amount of liquidity that the central banks have pushed into the system, and will continue to push in.”
This frenzy comes as the COVID crisis continues to gouge deep scars into developing economies.
Budget gaps are set to remain a cavernous 5.8% of gross domestic product on average in emerging markets in 2021, Morgan Stanley anticipates, having nearly doubled this year and increased debt-to-GDP ratios by double-digit amounts.
This year has also seen a record six sovereign defaults, and more than 20 other kinds in the wider EM debt universe.
“Right now we have absolutely rampant bullishness, and therefore this is a market that is open to pretty much anything,” said David Hauner, EEMEA cross asset strategist at BofA.
“Early next year is still going to be the same movie – but at the same time, while no one exactly knows what the risks are, as we know when markets get very complacent, that is usually when something happens.”
Yet after a record year for EM hard currency bond sales, with $726 billion sold according to Refinitiv data, 2021 is set to bring more eye-catching deals to cater for red-hot demand.
Two trends look set to become the new normal – governments and companies selling debt with, first, longer payment timelines, and second, in their local currencies rather than dollars or other major FX denominations that big international investors often prefer.
“There’s so much support from central banks, which we expect to continue, and so much liquidity. Investors are showing real interest in the market,” said Stefan Weiler, head of CEEMEA DCM at JPMorgan.
“That’s why you’ve seen already a 100-year tranche from Peru, and I would not be surprised to see other ultra-long deals next year.”
(Graphic: Emerging markets bond yields falling fast: )
Century bonds, as they are known, are relatively rare. Mexico has done one, as did Argentina in 2017, although that ended spectacularly in default this year.
In the developed world, Austria, one of the pioneers of the tenor, sold another in June which has more than doubled in value since.
Investors’ preference for longer-dated paper also reflects their comfort with debt levels. EM debt is forecast to reach 66% of GDP in 2021, around half that of their developed peers, estimates Pictet Asset Management.
The second trend expected to gain traction is a preference for local currency bonds.
In the doldrums since the global financial crisis, the asset class has been widely overlooked by international investors in recent years, despite accounting for the bulk of the roughly $30 trillion EM bond market.
Signs of fresh interest emerged last month when Uzbekistan, a debutant in international markets last year, issued a Uzbek sum tranche for the first time.
“With foreign ownership of local (currency) debt at historical lows, we expect foreign investors to have to continue to compete with local players for what continue to be attractive real yields,” said Alper Gocer, Pictet’s head of EM local currency debt.
Appetite is likely to be supported by anticipation of continued fragility in the dollar. That should help EM currencies, which are some 25% undervalued, estimates Pictet.
This year has also seen a further push into euro-denominated debt, with borrowers such as China and South Korea loading up in anticipation of protracted negative interest rates from the European Central Bank.
A record $115.3 billion was issued in euros by EM names, Refinitiv data showed. Around 25% of JPMorgan’s emerging market euro bond index is already negative yielding it calculates.
Bankers say China and South Korea’s recent negative-yielding euro bond almost certainly won’t be the last. AA- rated Israel is seen as another possible candidate, while in eastern Europe, Poland, the Czech Republic and Slovakia have all had sub-zero yields, as had Abu Dhabi’s sovereign investment fund Mubadala.
Next year is also likely to set new boundaries for emerging market companies as they try to get back to normality and expansion.
JPMorgan forecasts that EM corporates will issue a record $522 billion of debt, offsetting what could be a slight dip in the amount of sovereign debt on offer.
“More certainty on the economic outlook should see companies looking to expand more on capex,” said Weiler. “I would imagine that you will probably also see more M&A, which will fuel capital markets activity.”
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