In January 2023, significant growth was observed in various regions of the global bond market. Record sales of new debt securities were recorded in Europe and emerging markets. Governments of emerging nations such as Mexico, Saudi Arabia, and Mongolia collectively issued $61 billion in international bonds, surpassing the previous January high of $41 billion, as per Refinitiv data dating back to 1970.
European governments achieved a record of $75 billion in bond sales for the month of January, while companies with investment-grade ratings issued debt securities at the quickest pace for January since 2011. This was as concerns regarding a potential recession in Europe and the continent’s energy security declined.
William Weaver, the Head of Debt Capital Markets for Europe, the Middle East, and Africa at Citigroup Inc. based in London, stated that investors are increasing their orders, requiring lower premiums, and opting for higher risk issuances.
Mr. Weaver, whose team has generated over $105 billion in funds for governments, banks, and companies this year, stated that the situation is very hectic. It is a significant shift, with not only an increase in volume but also a change in the types of transactions being made. This year, riskier deals that couldn’t be done last year are now being executed.
After a decade of low-interest rates, the recent rise in interest rates has made bonds more attractive to investors. This is further amplified by the indications of slowing economies, peaking inflation, and central banks reaching the upper limits of their interest-rate cycles.
However, the increasing rates and swift inflation can negatively impact the value of older bonds due to the fixed nature of their payments. This factor, among others, led to significant losses in global bond indexes last year.
Fraser Lundie, the head of fixed income for public markets at Federated Hermes in London, stated that fixed income is now a more viable alternative to equities as an asset allocation option. This shift has resulted in an imbalance between bond supply and demand in recent weeks.
Last year, the appreciation of the dollar and the impact of Russia’s invasion of Ukraine on commodity prices resulted in investors retreating from emerging markets. This led to a slowdown in bond sales, with not a single international bond being issued by an emerging market government in July. Some economies, such as Ghana and Sri Lanka, had to seek financial assistance from the International Monetary Fund.
However, Yvette Babb, a portfolio manager at William Blair Investment Management, noted that the shift to less stringent monetary policies and China’s reopening have improved the growth prospects for emerging markets. In recent weeks, Babb has invested in bonds issued by Turkey, Serbia, and Hungary.
Apart from emerging markets, a diverse range of companies and governments globally are rushing to access the bond markets. This includes a $14 billion bond deal sold by a syndicate of banks on behalf of Spain, a $2.1 billion bond offering by US consumer goods giant Procter & Gamble, and several bond sales by financial institutions such as Bank of New York Mellon and Commerzbank AG, which are frequent users of the global debt markets.
Toyota Financial Services, the financial arm of Toyota Motor Corp., was among the companies that quickly entered the market in early January with a $3 billion, four-part deal. Adam Stam, the head of markets and liquidity at the company, stated that the order book was the strongest since the start of the pandemic.
Christian Hantel, a global corporate-bond portfolio manager at Vontobel Asset Management based in Zurich, reported that his firm had redirected funds from the US to Europe, taking advantage of the broad market rally and declining concerns about a deep recession and energy shortages resulting from Russia’s invasion of Ukraine. According to Hantel, the firm favored the US over Europe last year because the US was considered to be more immune to discussions about energy supply, potential recession, and inflation. However, this has recently shifted slightly towards Europe.
The yield on the index of high-quality euro-denominated corporate bonds monitored by ICE Data Indices has dropped to 3.9% from 4.2% at the end of last year. Furthermore, the yields on European government bonds, which form the basis for the borrowing rates of corporations and households, have also decreased.
In Asia, the yields on investment-grade bonds have declined to around 5.5% from approximately 5.8% at the end of last year, as per the ICE BofA index. It’s worth noting that yields decrease as prices increase.
According to Henry Loh, head of Asian credit for Abrdn, a fund manager, even though yields have decreased, they are still very attractive for entering the market, especially for investment-grade bonds.
Despite the growth in certain markets, the overall bond sales have decreased this year, dropping 15% from January of last year to $858 billion. Winnie Cisar, global head of strategy at CreditSights, stated that the slower pace of US issuance is due to several financial firms borrowing preemptively last year, and the increasing borrowing costs are causing companies to reconsider using new debt for funding moves such as mergers and share buybacks.
In Asia, some companies have found it easier to borrow in local-currency debt markets rather than abroad, as the global demand for investment-grade dollar bonds has not yet fully recovered from China’s property crisis and regulatory concerns. Additionally, the world’s riskiest borrowers, such as companies with low credit ratings and poorer nations, have not yet returned to the market, reflecting ongoing concerns about the expected global economic slowdown and uncertainty over the speed of inflation decline.
According to Mr. Weaver of Citi, it’s challenging to be confident that the market has fully recovered. He also mentioned that some bond issuers are front-loading their fundraising this year, which is likely to result in lower volumes of new-bond sales later in 2023.
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