September’s Big Borrowing Spree Underscores Emerging Market Fear

(Bloomberg) -- Borrowers in the developing world are shoring up their defenses against volatility that could shake their biggest markets in the US and derail refinancing plans.

In just the first five days of the month, they’ve sold more bonds than at the outset of any previous September. Issuance by governments and companies hit $28 billion through Friday, according to data compiled by Bloomberg. In the same period last year $12 billion of deals were closed.

Many issuers are trying to get ahead of the US presidential vote in November and another growth scare akin to Aug. 5 when panicked investors fled everything from emerging-country currencies to Japanese shares. It spurred the longest run-up in borrowing costs for emerging market sovereign borrowers in about six years, according to a JPMorgan index.

“Most issuers have chosen very well to come to the market ahead of potential volatility,” said Alexander Karolev, head of JPMorgan Chase & Co.’s CEEMEA bond syndicate desk. “You will now see a significant decrease in issuance volumes in the next weeks because of risk events.”

For now, emerging market issuers are still enjoying some of the lowest yields in two years, at an average 6.5%, according to a Bloomberg index for dollar-denominated government and corporate debt, giving them the all-clear to primary markets.

Many have already filled their funding needs for the year, while investors are happy to oblige them before interest rate cuts reduce yields even more. Abu Dhabi National Oil Co., Indonesia and Uruguay headlined this week’s deals.

Calls for aggressive easing by the Federal Reserve when it meets later this month are growing louder as data paint a mixed picture of the US economy. Friday’s payrolls report showed job growth fell short of expectations. A measure of US rate volatility suggests turbulence is ahead.

“Obviously a large slowdown is bad for emerging markets,” said Nick Eisinger, co-head of emerging markets active fixed income at Vanguard Asset Services Ltd. “Now is a good time to move on issuance.”

The dollar is the favorite currency option to hedge volatility because of its size and ease of trading, and deals in the American currency have become even more popular this year, outpacing those in euro and other hard currencies by a growing margin.

This week transactions denominated in US dollars accounted for 86% of sales, compared with an average 78% in 2023. For emerging market issuers, that makes navigating the twists and turns in the American economy and political sphere all the more important.

“Issuers will be mindful of US elections around the corner, and the risk that if US growth concerns mount, spreads could move sharply wider,” said Carmen Altenkirch, an analyst at Aviva Investors. “Early August was a reminder to all just how fickle the market can be.”

Sales of dollar bonds by emerging market governments and companies jumped 54% this year to $349 billion, according to data compiled by Bloomberg. That marks the biggest year-on-year increase in dollar-denominated bond sales since 2012. Those in euro rose by 26% to €64 billion while sales in the Japanese yen, Swiss franc and the British pound totalled $9 billion.

The dollar provides “deep liquidity, which allows you to carry out large-scale borrowing transactions on favorable terms,” Kaspars Abolins, who heads Latvia’s Treasury department, said in emailed comments. Abolins said he expects the government will be a regular issuer of dollar bonds after the nation issued dollar bonds for the first time in more than a decade in May.

“This is an environment where you want to tap the investor base that that offers you the sponsorship, the liquidity,” said Trang Nguyen, global head of emerging-market credit strategy at BNP Paribas. “That’s what a dollar bond issue does for you.”

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--With assistance from Aaron Eglitis.