Optimism may be shaking but EM’s recovery was always going to be rocky
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Optimism may be shaking but EM’s recovery was always going to be rocky

Issuance from the likes of Egypt shows that, even after a downturn, the market is far healthier than in 2022

Cliffs and sinuous road at Serra do Rio do Rastro, Lauro Muller, Santa Catarina, Brazil

Unwelcome economic data this month has dented some of the optimism in emerging market bonds. But the asset class remains in a far brighter state than it was last year.

January was a record month for the issuance of new CEEMEA bonds. February is less than $5bn away from breaking that month’s record with another week to go — not including another $1.5bn from Egypt on Tuesday.

Investors have enjoyed billions of dollars of inflows, so they have the confidence to put their money into new bonds.

Higher than expected US jobs and then US inflation figures this month have dampened that optimism. But after the year EM bonds had in 2022, to expect inflation to ease smoothly was optimistic in the extreme.

The 10 year US Treasury yield has risen by 50bp since the start of February, standing at 3.94% on Tuesday afternoon.

As one EM fund manager put it, those figures “shocked” everyone back to reality.

Inflows have reversed, with $742m leaving EM bond funds in the week to February 17. This snapped a five week run of net inflows. Some EM investors predict that yields will go higher, which will put off issuers funding in dollars.

Many of the problems that made last year so difficult for EM issuers and investors linger. One challenge from last year, China’s zero Covid-19 policy, has disappeared, but that is unique.

There is no sign of peace in Ukraine. If anything, the war is getting worse and the chance of escalation is rising. Inflation is still high, even if it may have peaked, and interest rates in the US will not be lowered for some time yet.

But the fact that single-B rated Egypt, which late last year had to seek IMF aid, was executing a sukuk on Tuesday shows the market remains in a far better state than it was last year.

Egypt had little chance of accessing the primary market at any point in 2022. Another sub-investment grade North African issuer, the BB rated Kingdom of Morocco, mandated on Tuesday, showing Egypt’s foray into the safer sukuk market is not an outlier.

CEEMEA issuance has continued more or less unbroken throughout this year, and syndicate bankers have deals in the pipeline — notwithstanding higher than expected inflation figures.

This is a stark contrast to 2022 when the primary market experienced shutdowns lasting several weeks.

So, yes, US Treasury volatility has returned and investors are not as happy as they were in January. But after such a bad 2022, any recovery was never going to be a smooth ride.

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