EM bonds give stellar returns so far in 2019; appetite remains strong


ET Intelligence Group: It may not be the best of times, but the year 2019 has certainly been a good year for emerging market sovereign bond issues. Nearly $13-trillion worth of developed world debt is trading at a negative yield, and the appetite for emerging market debt has remained quite robust.EM countries have raised around $51.87 billion since the beginning of the year and there is a sizeable pipeline of borrowing for the rest of the year. The appetite can be gauged by the fact that Saudi Arabia is planning to raise 7.5 billion in euro-denominated bonds for the second time after raising a similar amount in dollars in January. The demand from dollar investors in January was nearly four times its issue size. Indonesia, whose credit rating is quite similar to India, borrows at half the rate (3.2 per cent) overseas compared with the domestic yield of 7.17 per cent. It is now planning to raise $8.5 billion through sovereign bonds this year.

Emerging market governments have raised $168 billion in bonds overseas this year compared with $266 billion last year, according to data compiled from Bloomberg. The average coupon rate of EM sovereign bond is 4.25 per cent in 2019 so far against 5.26 per cent in 2018. Middle-East countries have been among the biggest borrowers with Qatar, Saudi Arabia and Egypt raising $24 billion, $22 billion, and $ 12 billion, respectively, and accounting for nearly one-third of total EM sovereign bond issuances.

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According to dealers, India could raise five-year funds at 3.0-3.25 per cent based on its current credit rating. EM bonds have also returned much better than developed marketbonds, and five-year returns surpass those of MSCI Equity returns.

Most emerging market sovereigns are currently quoting at a yield of 3-3.20 per cent.

There is a reason for the strong appetite. Developed market central banks are moving towards more easing and this in turn is making it the best return in a decade for EM bonds. The Bloomberg Barclays EM USD total return index — a gauge for EM bond performance — delivered 9.7 per cent since the beginning of the year, the most in any similar time period in a decade. Experts see the momentum to continue as monetary easing burnishes the appeal of the higher-yielding assets. Sovereign EM nations can raise funds for long-term maturity up to 50 years. Guatemala, Egypt, and Israel have raised money through bonds maturing in 2050.

Prithviraj Srinivas, an Economist at Axis capital, said that foreign borrowing of the union government is likely to get an encouraging response for the first issue owing to ample forex reserve and low external borrowings.

Joydeep Sen, a consultant at Phillips Capital, said there is some distortion in global yields as Greece, which was on the verge of default, is quoting at 2.1 per cent, similar to US 10-year. India is fundamentally superior, but yield offered by the country will depend upon sovereign rating and perception of India among global investors.


Author: Loki