Corporate borrowers aren’t far behind. Issuers from Russia, where Eurobond sales dwindled because of international sanctions, are testing the waters. Fertilizer maker EuroChem Group AG has selected six banks including JPMorgan and Sberbank PJSC for an offering. Both underwriters predict more deals out of Russia. Also, China Everbright Bank Co. met investors last week.
“There is a genuine thirst for yield in this market climate,” said Angelo Rossetto, a trader at GMSA Investments Ltd. in London. But “there is a general lack supply. Issuance will kick off again.”
To succeed, issuers may have to strike a balance between exploiting lower borrowing costs and keeping it attractive for yield chasers. The risk premium investors demand to own emerging-market sovereign bonds rather than U.S. Treasuries has fallen about 175 basis points since touching a peak in February. Average yields on local-currency bonds are at a record low and on dollar bonds at the cheapest in three years.
While most investors take that as a vote of confidence in the asset class, some strategists are concerned valuations may discourage buyers if the Fed turns hawkish.
“We are now quite far from spreads on a fair-value basis,” said Bhanu Baweja, London-based head of emerging-market cross-asset strategy at UBS Group AG.. “Unless issuers are willing to issue at well wider spreads, I am not sure the appetite will remain as high.”
Still, the primary market is showing none of that hesitation. Deals in the next several weeks may rival the second quarter when Argentina’s return to international markets spurred combined sales of $60 billion in April alone, according to Rossetto. JPMorgan, the lead arranger of deals in 2016, projects an all-time high of $125.5 billion of sovereign issuances this year.
“Any supply will meet that headwind if the talk about rate hike becomes louder,” said Gregory Saichin, who helps manage $2.4 billion at Allianz Global Investors. “In the main-case scenario of no hike, substantial supply will hit the market.”
This article was provided by Bloomberg News.