Sales of dollar bonds by emerging governments may surge 20 percent over 2013 levels, analysts at Barclays calculate. They predict $94 billion in bond issuance in 2014 compared to $77 billion that seems likely this year. In net terms –excluding amortisations and redemptions — that will come to $29 billion, almost double this year’s $16 billion.
According to them, the increase in issuance stems from bigger financing needs in big markets such as Russia and Indonesia along with more supply from the frontiers of Africa. Another reason is that local currency emerging bond markets, where governments have been meeting a lot of their funding needs, are also now struggling to absorb new supply.
The increase is unlikely to sit well with investors — appetite for emerging assets is poor at present, EM bond funds have witnessed six straight months of outflows and above all, the projected rise in sovereign supply will come on top of projected corporate bond issuance of over $300 billion, similar to this year’s levels. (See graphic)
Our overall supply forecast does not appear particularly supportive for EM sovereign credit going into 2014, and the outlook could be further clouded if issuers try to meet their financing requirements early in the year, seeking to take advantage of still-low core rates, and hence modest overall financing costs, before an eventual start of QE tapering leads to a rise in US Treasury yields.
JPMorgan also is advising clients to go neutral on hard currency emerging debt (it had recommended moving overweight in September after the Fed decided to defer tapering), noting that elections in many developing countries and slow growth are additional headwinds for the sovereign sector. JPM expects that returns on the sector next year will be no more than 1.6 percent, though that is still better than the minus 7 percent it is projecting for 2013.