Emerging-market borrowers are on course to sell more bonds than ever this year after yields hit record lows and developing economies rebounded faster from the credit crisis than advanced nations.
Governments and companies in developing countries including Vale SA, the world’s biggest iron-ore exporter, and Korea Electric Power Corp., South Korea’s largest electricity producer, borrowed $196 billion from July to September, a record for any quarter, according to data compiled by Bloomberg. Bond sales surged from $157 billion in the second quarter of 2010 as yields in developing countries slid to an all-time low of 5.4 percent on Aug. 23 from as high as 6.8 percent in February, JPMorgan Chase & Co.’s EMBI+ index shows.
Emerging market borrowers from India’s Rural Electrification Corp. to OAO Gazprom, Russia’s largest company, are in the process of selling at least $13.6 billion of bonds, adding to the $521 billion issued so far in 2010, which is 15 percent above the same period last year, Bloomberg data show. More issuers will rush to the market to lock in the low rates while they last, according to Henry Stipp at Threadneedle Asset Management.
“There’s going to be more issuance for sure as long as interest rates in the United States continue to be low,” said Stipp, who oversees about $98 billion of assets as a fund manager at London-based Threadneedle. “They’ll pre-empt 2011 if they can.”
Yields plummeted as U.S. Treasury bond rates fell in the third quarter on the prospect that the Federal Reserve will make a new round of bond purchases to stimulate the economy. The yield on 10-year U.S. Treasury notes declined to 2.9 percent yesterday from 4.6 percent at the end of 2009.
Investors reduced the extra yield demanded from developing nation bonds over U.S. Treasuries to as little as 263 basis points on Aug. 9 from 355 basis points on May 25, according to the JPMorgan’s EMBI+ index, as faster economic growth rates buoyed confidence. Emerging-market economies are set to grow by 6.8 percent in 2010, more than double the 2.6 percent pace for the developed world, the International Monetary Fund said July 7. Asia will lead, with 9.2 percent growth.
Companies accounted for more than 80 percent of bonds sold in the third quarter, a jump from 50 percent in 2000, data compiled by Bloomberg show.
Shift to Asia
Vale, based in Rio de Janeiro, sold $1.75 billion of bonds on Sept. 8, in its biggest offering in four years, according to data compiled by Bloomberg. Rising metal demand in China helped the company’s second-quarter sales almost double to $9.9 billion from $5.1 billion a year ago, Vale said on July 30. Its dollar bonds due in 2020 yielded 4.3 percent on Sept. 30, down from 4.6 percent on the first day of trading on Sept. 13.
Korea Electric Power sold $700 million of 2015 bonds on Sept. 27. They yielded 3 percent yesterday, little changed from their trading debut the day before. The Seoul-based utility said in an e-mailed statement on Sept. 29 that it had agreed to buy a $400 million stake in a Philippine power plant from BG Group Plc.
“The emerging market debt issuance trend is likely to continue for the rest of this year and next, at least, with shifts in the composition of the issuance,” said Jeffrey Sacks, a portfolio manager who helps oversee $3 billion in emerging- market assets at Principal Global Investors Europe in London. The fastest growth will be from companies, particularly in China and India, he said.
Rural Electrification Corp., India’s state-run lender to power projects, may sell as much as $500 million of five- or seven-year bonds in yen or dollars as early as November, Finance Director Hari Das Khunteta said in a phone interview from New Delhi on Sept. 14. Gazprom, the world’s biggest producer of natural gas, plans to sell its first international bonds in more than a year by the end of 2010, Yana Kolosovskaya, the company’s head of loans and guarantees, said in an interview in London on Sept. 21.
About 37 percent of the third quarter’s emerging-market bond sales were by Chinese or Indian issuers, according to data compiled by Bloomberg. The proportion was up from 32 percent in the first quarter.
While emerging-market sovereign bond yields tumbled from 6.7 percent on May 25, the rally in developing country debt may be ending, according to Regis Chatellier, emerging-market strategist at Morgan Stanley & Co. in London. The glut from the ongoing supply could stunt the rally, he said.
“We’ve seen record issuance this month and that’s probably weighing on the market right now,” said Chatellier.
Concern that the global economy may weaken, particularly in the U.S., could also reduce appetite for emerging-market bonds, he said. A slowdown in the U.S. may curb demand for exports, while a rebound may push yields for Treasuries and emerging- market bonds higher, Chatellier said. The spread over Treasuries could widen beyond 3.4 percentage points in coming weeks, he said.
Senior officials from the U.S. Federal Reserve publicly disagreed on Sept. 29 over whether to step up monetary stimulus to revive the economy. Boston Fed President Eric Rosengren said further action should be considered to cut unemployment and raise inflation. Philadelphia Fed President Charles Plosser said the central bank risked sacrificing its inflation-fighting credibility if it loosened policy too much by buying U.S. government bonds.
“The sustained low rate environment is likely to keep encouraging both sovereigns and corporates to seek cheap funding,” said Sacks at Principal Global.
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