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Emerging Markets

EM bonds are dicing with disillusionment

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Appetite is reviving for emerging market debt, but it must be handled with great care

CEEMEA bond issuers are having a good September. A flurry of borrowers have dipped into the market already this month to print new debt and syndicate bankers are sounding hopeful that there will be more.

But they and their clients need to show extreme caution. Demand is not so strong that borrowers can take it for granted or ride roughshod over investors.

Bankers on recent deals claim there is plenty of demand out there, and the market certainly seems to be in a better state than it was. But there is none of the hearty enthusiasm from investors that was evident in January. On the contrary, plenty of signs point to them being skittish.

Romania’s new euro issue this week, for example, traded down in the secondary market. The leads blamed it on Romania having taken a little more money than the market had expected — €3.25bn rather than €2.5 to €3bn.

Later in the week a huge chunk of Slovenia’s order book for its dollar bond fell away when it rammed pricing 10bp tighter at launch.

These stumbles followed a kerfuffle last week when two Turkish banks printed deals closer together than investors felt was comfortable, prompting worries about further supply which affected both.

Bonds are getting done, but CEEMEA issuers are on thin ice. For the market to remain open and for confidence in emerging markets to grow, investors have to feel the new paper they buy will perform in secondary. Some of it has — but if enough of it doesn’t, investors will let more and more pass by.

It is hard for bankers and issuers to think of the greater good of the market when their bond is the one at stake. It is natural for borrowers to want the tightest price and the biggest size, especially after two years of volatility-stricken markets.

But exercising restraint while investors remain on the fence could help buyer momentum to grow, and that will be good for everyone in the longer term, not just the next issuer up to print.