Emerging markets debt issuance soars

In the first half of this year emerging market countries and companies sold US$ 79 billion of international bonds, with Colombia raising US$2 billion - the most in two years according to data compiled by Bloomberg.

Investors have snapped up the new debt on the expectation that stimulus plans, interest-rate cuts and the promise of as much as US$750 billion from the International Monetary Fund (IMF) will help struggling nations to overcome the global recession.

The rally that has followed has seen the yield spread on emerging market bonds over US Treasuries, narrow 245 basis points from the end of December to a spread of T+445 on June 30, the biggest contraction since 2003.

Helene Williamson, Head of Emerging Debt at F&C and manager of the F&C Emerging Markets Bond Fund, commented: "The success of the recent issuance highlights how far and how fast market confidence has rebounded since February when Mexico tried and failed to place all its desired allocation of 2030 bonds."

Against this background, Argentine bonds are amongst those that have outperformed the broader market with the spread versus Treasuries shrinking from T+1965 in November to T+916 (27 July). However, while the yield gap has narrowed, it remains more than three times wider than Brazil's T+248 spread. Williamson is overweight Argentina, a stance that has yielded good relative outperformance as she bought into the market when it was cheap. At that time the spread over Treasuries was 1,500 basis points.

She added: "We believe there is potential for further upside in Argentina if the Kirchner government softens its stance on IMF assistance The country needs an economic stimulus and without access to the international capital markets - not possible since the massive default of 2001 - its government has few options left to improve its popularity. On 28 June, Cristina Fernandez de Kirchner's ruling coalition suffered a defeat in mid-tem elections. Although the EMD issuance normally nearly dries up in the summer months this year has seen new sovereign deals arriving, with US$9bn of sovereign debt issued in July alone."

Williamson concluded: "With the global economy looking to have turned a corner, commodity prices rising and equity markets rallying, a number of emerging markets countries are poised to see their sovereign bonds extend gains. It seems that the appetite for emerging market debt remains as yet unsatisfied with sovereign issuance still short in supply when compared to activity in the corporate sector."