September’s bond bonanza
What a half-month it has been for bond issuance! As we wrote here, many borrowers — corporate and sovereign; from emerging markets and developed — have seen this period as a last-chance saloon of sorts to raise money on global capital markets before the Fed starts to cut off the supply of free cash.
But the month so far has been different not only in the sheer volume of supply but also for the fact that issuance by governments of developing countries has surpassed emerging corporate bond sales. That’s something that hasn’t happened for a long time.
By the end of last week, sovereign issuance for September had hit $13.5 billion, more than any other month this year and a quarter of the total 2013 sovereign issuance so far, according to analysts at JPMorgan. In comparison, sovereign issuance historically averages $2.2 billion a month, rising to $5 billion every September following the summer lull. Issuers were Russia with $7 billion, South Africa and Romania with $2 billion each; while South Korea and Indonesia raised $1 billion and $1.5 billion respectively. JPM writes:
While we had anticipated a pick-up of supply in September, the pace of sovereign issuance so far is higher than any previous September and bears more resemblance to the pace often exhibited in the first quarter.
In contrast, corporates have priced 11 deals this month totaling $5.5 billion and that’s well below the levels seen in the first two weeks of September 2012, says David Spegel, head of emerging debt at ING Investment Management:
It can be safely said that the corporate market hasn’t completely recovered. However, this is typical just exiting market shocks as investors prefer sovereigns and large/liquid higher grade corporates. Assuming that the market recovery continues, there will likely be a further $30 billion of corporate issuance this month
What’s more, all this supply has been well received, with most deals 3-5 times subscribed. Most issuers have offered significant concessions to their existing bond curves, recognising these prices as still being extremely cheap. Another reason is that investors have cash in hand — they are receiving $8.6 billion worth of interest payments and amortisations this month. Cash balances in investment portfolios have risen for four straight months to almost 4 percent, JPMorgan’s monthly investor survey shows.
Spreads on the sovereign EMBIG bond index and corporate CEMBI index are likely to widen from here until year-end however if new supply keeps coming. Brazil, Hungary, Kenya and Armenia are seen as keen to raise some cash while the Fed is still printing money. Others may try to pre-finance for 2014.
JPM expects another $22 billion in sovereign issuance and $69 billion in corporate bonds until end-2013. And appetite for emerging debt is not what it was — bond funds have seen outflows for 16 straight week.
All eyes are on the Fed now. If it decides this week to cut back — or “taper” — its bond-buying at a slower pace than the markets expect, the bond bonanza could continue into next month.