CEE sovereigns impress with issuance flood as rate rise looms
Investors shrugged off warnings from the US Federal Reserve over tighter monetary policy to lap up tightly priced issues by emerging European sovereigns this week.
Emerging market sovereigns across central and eastern Europe are showing off their access to capital markets, as investors said they are willing to pile in on tight trades, despite mounting global concerns over rising rates and inflation.
Hawkish comments from the Fed indicating the tapering of monetary stimulus and an increase in interest rates have not deterred issuers.
With the Fed now planning to hike at least twice by the end of 2023, issuers are wasting no time, taking a proactive approach to funding. Latvia mandated for a euro benchmark bond on Tuesday, just days after Slovenia debuted in the sustainability bond market.
Those trades followed a busy start to the year for emerging European governments that sought to bolster their reserves as they continued to combat the impacts of the pandemic and stimulate economic recovery. A number of governments braced the market, even after volatility kicked off in the first quarter, including Romania, Slovakia, Ukraine and even Russia.
Periods of rates volatility are usually enough to force issuers, both sovereign and corporate, to play it safe. That happened briefly in March, when yields on US Treasury bonds spiked to more than 1.7% — around 80bp higher than where they had started the year at 0.93%. At the time, primary markets temporarily adopted a ‘wait and see’ approach. As of Tuesday, the 10 year was yielding 1.486%.
Now, investors have said they are “impressed” at how easily such sovereigns have been coming to the market, with many being compared to developed market governments. Issuers, they said, are not giving up any concessions either, even earning the label of being “greedy”.
Some investors, including Barings, the US asset manager with more than $326bn of assets under management, told GlobalMarkets, GlobalCapital’s sister publication, that issuance levels across CEE, and more broadly CEEMEA, were on track for another record-breaking year.
Some borrowers have taken the opportunity to enter the market multiple times — such as Slovenia, which has now concluded its third bond of the year.
Although the fact that issuers are pricing so tight means that some trades are underperforming in the secondary market, the access to funding is no issue at all, investors said.
“EM spreads widened briefly in February and March, which was driven by underlying core rates,” said Trieu Pham, emerging market debt strategist at ING in London. “However, since then spreads have been well contained, in fact tightening in mid-June. Though spreads have been well behaved, it is too early to say if that will last as liquidity conditions change.”