GRAPHIC Anything goes in the delusional world of emerging market debt


Pedestrians wearing face masks are reflected on an electrical panel showing stock prices outside a brokerage house in a business district in Tokyo, Japan, January 30, 2020. REUTERS / Kim Kyung-Hoon

LONDON, Dec. 17 (Reuters) – Coronavirus vaccine euphoria sweeping global markets fuels a mad race for developing country debt that shatters all borders and previous records, and shows no signs of slowing down .

Vaccine breakthroughs, the US election result, and the pile of $ 15 trillion in negative-yielding debt for most developed countries mean that almost anything with an interest rate still visible to the naked eye is sucked in. .

As a result, Laos, a country with one of the lowest possible credit ratings, was able to issue a benchmark bond this week. Peru, which recently had three presidents in just over a week, also sold a 100-year bond.

China and South Korea issued their first negative yielding government bonds, proving that only Europe and Japan are now where investors are paying, rather than being paid, for to lend.

“Obviously is that crazy,” said Riccardo Grassi of the Swiss fund Mangart, which mainly specializes in distressed debt and other types of riskier debt.

“This gives you an idea of ​​how much investors are trying to extract even small gains from the enormous amount of liquidity that central banks have injected into the system and will continue to inject.”

This frenzy comes as the COVID crisis continues to leave deep scars in developing economies.

Budget gaps are expected to remain a whopping 5.8% of gross domestic product on average in emerging markets in 2021, Morgan Stanley predicts, having nearly doubled this year and increasing debt-to-GDP ratios by double-digit amounts.


This year also saw a record six sovereign defaults, and more than 20 other types in the larger universe of emerging debt.

“Right now we have an absolutely rampant uptrend, so it’s a market that’s open to pretty much anything,” said David Hauner, EEMEA cross-asset strategist at BofA.

“At the start of next year, it’s still going to be the same movie – but at the same time, while no one knows exactly what the risks are, as we know when the markets get very complacent, it’s usually when something happens.”

Yet after a record year for emerging market hard currency bond sales, with $ 726 billion sold according to Refinitiv data, 2021 is expected to bring more eye-catching deals to meet searing demand.


Two trends are set to become the new normal: governments and companies selling debt with, on the one hand, longer payment terms and, on the other hand, in their local currencies rather than dollars or others. Major currency denominations that large international investors often prefer.

“There is so much support from central banks, that we plan to continue, and so much liquidity. Investors are showing a real interest in the market,” said Stefan Weiler, CEEMEA DCM manager at JPMorgan.

“That’s why you’ve already seen a 100-year-old slice of Peru, and I wouldn’t be surprised to see more ultra-long transactions next year.”


Centennial bonds, as they are called, are relatively rare. Mexico made one, as did Argentina in 2017, although it ended in a spectacular default this year.

In the developed world, Austria, one of the tenor pioneers, sold another in June whose value has more than doubled since.

Investors’ preference for longer-term papers also reflects their comfort with debt levels. Emerging market debt is expected to reach 66% of GDP in 2021, about half that of their developed peers, estimates Pictet Asset Management.


The second trend that is expected to gain ground is a preference for local currency bonds.

In the doldrums since the global financial crisis, the asset class has been largely overlooked by international investors in recent years, despite making up the bulk of the roughly $ 30 trillion emerging market bond market.

Signs of new interest emerged last month when Uzbekistan, a newbie in international markets last year, first issued an Uzbek cash installment.

“With foreign ownership of local (foreign exchange) debt at historically low levels, we expect foreign investors to continue to compete with local players for what continue to be attractive real returns,” said Alper Gocer, Head of Emerging Local Currency Debt at Pictet.

Appetite should be supported by the expectation of persistent dollar weakness. This should help emerging currencies, which are undervalued by around 25%, believes Pictet.

This year has also seen a new push towards euro-denominated debt, with borrowers such as China and South Korea rushing in anticipation of prolonged negative interest rates from the European Central Bank.

A record $ 115.3 billion was issued in euros by names in emerging markets, according to data from Refinitiv. According to his calculations, around 25% of JPMorgan’s Euro Emerging Markets Bond Index is already showing negative returns.

Bankers say the recent negative-yielding euro bond from China and South Korea is unlikely to be the last. Israel, rated AA, is seen as another possible candidate, while in Eastern Europe, Poland, the Czech Republic and Slovakia all had sub-zero returns, as did the sovereign investment fund d ‘Abu Dhabi Mubadala.


The next year is also likely to set new limits for companies in emerging markets as they attempt to return to normalcy and expansion.

JPMorgan predicts that emerging companies will issue a record $ 522 billion in debt, offsetting what could be a slight drop in the amount of proposed sovereign debt.

“Greater certainty about the economic outlook should lead companies to look to further increase their capital spending,” Weiler said. “I imagine you will probably also see more mergers and acquisitions, which will fuel the activity in the capital markets.”

Additional reporting by Karin Strohecker; Editing by Jan Harvey

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