Emerging market bond issuance has rebounded strongly from last month's slump, with issuers from countries like Brazil and Turkey seizing the opportunity of improved market conditions to raise new funds. Data shows that the volume of U.S. dollar and euro-denominated bonds issued by developing nations this month is approximately 200% higher than in April of last year. As of last Friday, total financing reached $46 billion, as governments and companies rushed to capitalize on the improved market sentiment, fueled by hopes of a peace agreement between the U.S. and Iran. This resurgence in bond issuance follows a sharp decline last month, when conflict in the Middle East dampened investor appetite for risk assets. Now, with trading activity picking up and stock markets nearing pre-conflict levels, emerging markets have once again become a preferred investment destination for yield-seeking investors. "At present, the emerging market bond sector has largely moved past the risks associated with the conflict," said Laura Rilton, a portfolio manager at MFS Investment Management. "Issuance plans that were in preparation before the conflict and subsequently postponed are now entering the market, and with recent stability, investors have funds available for allocation." Rilton noted that emerging economies have recently demonstrated strong resilience—having recovered quickly from crises such as the pandemic and the Russia-Ukraine conflict. Although many countries were hit by soaring oil prices last month, numerous energy exporters in Africa and Latin America benefited from higher crude prices. Additionally, the capital expenditure boom in the artificial intelligence sector is seen as a positive factor for developing nations. Investors have actively subscribed to bonds from energy exporters like Brazil and Qatar, while issuances from Turkey and Poland have also been well-received. Newly issued bonds typically offer slightly higher yields than existing ones. On the corporate side, well-known institutions such as Banco do Brasil have returned to the bond market, and smaller entities like Kyrgyzstan's Eldik Bank have taken advantage of the improved conditions to debut in the U.S. dollar bond market. Since the U.S. and Iran reached a two-week ceasefire agreement, borrowing costs have continued to decline, creating a favorable environment for issuers. The average yield premium investors demand for holding emerging market sovereign dollar bonds over U.S. Treasuries has narrowed to about 245 basis points, below pre-conflict levels. "At current spread levels, the motivation to issue is strong," said Carmen Altenkirch, emerging markets sovereign credit analyst at Aviva Investors. "Sovereign issuers typically choose to issue during relatively stable market periods, especially regular issuers like Turkey." Data indicates that corporate bonds from emerging markets accounted for nearly $19 billion of the total issuance in April, an 88% increase year-on-year. Despite renewed tensions in the conflict on Monday, markets remained open, with Kazakhstan's railway operator appointing investment banks to arrange a dual-tranche bond issue. Earlier that day, Korea Ocean Business Corporation and China Water Affairs Group had also launched marketing for U.S. dollar bonds. The rebound in issuance has pushed the total volume of emerging market bond issuance so far this year to $281 billion, nearly 20% higher than the same period last year. This recovery mirrors increased activity in developed markets. New bond issues from countries like Italy and the U.K. have seen record subscriptions, while typically riskier subordinated debt issuance has also surged this month. One reason behind this trend is that many investors are eager to deploy idle cash accumulated during the market sell-off in March. Any agreement to end the conflict could trigger a broader global market rally. "It's not just emerging markets that have been relatively insulated from geopolitical impacts," said Kieran Curtis, head of emerging market local currency debt at Aberdeen Standard Investments. "My sense is that investment managers built up significant cash reserves last month. Actual outflows were very limited, so now investors need to allocate funds, and issuers are taking advantage of the opportunity." Brazil seized the window to issue its largest bond ever, raising €5 billion through its first euro-denominated issuance in over a decade. Although Turkey is sensitive to high energy prices, fund managers were still willing to provide financing, with its $2 billion bond issue seeing three times oversubscription. However, according to calculations by Nimrod Mevorach, a strategist at UBS Group, investors still demanded a premium of about 15 to 20 basis points for Turkey's new bonds, significantly higher than the 5 basis points in previous issuances. He noted that Poland, another energy importer, paid a premium of 12 to 15 basis points when it raised $6 billion in early April, whereas prior issuances had almost no premium. Demand was even more robust for the Democratic Republic of Congo's debut $1.25 billion dollar bond, which was four times oversubscribed. The two tranches offered yields of 8.75% and 9.5%, potentially attracting investors. Manuel Mondiah, a portfolio manager at Aquila Asset Management, noted that although the DRC has political fragility, it has low debt levels and is a major exporter of copper—a key raw material for AI-related capital expenditures. "This is a good deal for bondholders, and such spread levels are becoming increasingly rare," said Mondiah, who purchased the bonds. "The pursuit of yield is outweighing concerns about conflict and risk contagion."
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