(Bloomberg) — A record start to the year for emerging-market bond sales is at risk of fizzling as high Treasury rates hamper weaker credits from tapping international capital.
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While a recent surge in US bond yields has abated for now, investors fear the upward moves will resume after President-elect Donald Trump takes office on Monday, given his support for trade-tariff hikes and mass deportations, policies that are considered inflationary.
With that in mind, several EM sovereigns rushed to market as soon as 2025 got underway, taking the year-to-date tally of Eurobond sales to about $34 billion, up 12% from the same 2024 period. However, seven of this year’s eight bond issuers have investment-grade credit ratings, including Saudi Arabia, Mexico and Slovenia. The exception is Benin, which managed to place a $500 million bond on Thursday.
The trend favoring better-quality credits holds among EM corporates and government-linked borrowers too. Debt sales from junk-rated borrowers — those with scores below BBB-/Baa3 from the main ratings companies — amount to some $6 billion so far in 2025, down 7% from year-ago levels and the slowest start to a year since 2020, data compiled by Bloomberg show. And on Friday, Bahrain’s Arab Banking Corp. was forced to pull its issue after investors found the yield too low to stomach.
“Emerging markets are adjusting to the no-landing hypothesis of a stronger US economy, higher rates and sticky inflation,” said Mohammed Elmi, senior portfolio manager at Federated Hermes. “With an ‘America First’ policy mix to come from the new administration, it could exacerbate the rate selloff and raise emerging market borrowing costs even further.”
Against that backdrop, the average yield on EM dollar bonds has risen by more than 40 basis points in the past five weeks to about 6.84%, an index compiled by Bloomberg shows. But single-B rated borrowers — typically the weakest names — have seen a 54 basis-point jump in yields over the same period. The latter group are particularly vulnerable to Treasury rate moves and US dollar strength.
It all leaves high-yield borrowers with some stark choices: emulate Benin in paying a new-issue premium, borrow from organizations such as the International Monetary Fund, or wait for conditions to settle.
But another increasingly popular option is to explore less conventional funding sources, noted Marten Bressel, a money manager at Frontier Investment Management Partners.
These could include tapping private markets or bridge loans or issuing in a different currency. B-/B3-rated Angola, for instance, transferred a total of almost $2 billion of bonds in December and January to JPMorgan Securities Plc to use as a collateral in two repo operations in exchange for $1 billion in financing. Prior to that, JPMorgan Chase & Co. lent Panama $1 billion to help it with liquidity needs. And Pakistan is preparing to debut yuan-denominated bonds this year.
“For some EM high-yield borrowers, it may not be the right time to come to the public market,” said Mihai Florian, senior portfolio manager at RBC BlueBay Asset Management. “It is a very challenging and difficult time to sell bonds. Private credit markets would be the better option for them as it provides flexibility in size and duration.”
Still, the stabilization in Treasury yields has reassured some investors, as recent data and policymakers’ comments have revived wagers on Federal Reserve interest-rate cuts. Ten-year Treasury yields have retreated in recent days to about 4.6%, well off 14-month highs hit recently.
Data also shows that high-yield bond sales have got off to a slow start in each of the past three years, after the pandemic-time issuance boom of January 2021.
For Carmen Altenkirch, an analyst at Aviva Investors Global Services, it’s a matter of time before EM credits resume issuance. Once the Trump inauguration is past, she reckons companies and governments with no immediate financing pressures will watch for Treasury yields to ease further.
“Generally, investment-grade borrowers will issue first, followed by high yield. It is not a rule, but that’s just how it plays out in practice,” Altenkirch added.
What to Watch
Bank Negara Malaysia to likely to hold its overnight policy rate at 3.00% on Wednesday.
On the same day, South Africa’s CPI data will likely show the monthly price gain increased to 0.2% in December, from zero in November. This will take annual inflation up to 3.1%, from a prior 2.9%
On Thursday, Turkey’s central bank is expected to trim the policy rate for a second time in this cycle, taking the one-week repo rate to 45% from 47.5% currently
South Korea’s GDP growth likely remained weak in the fourth quarter, affected by a political crisis ignited by President Yoon Suk Yeol’s martial law attempt. Bloomberg estimate is GDP grew 0.2% quarter on quarter, following a 0.1% rise in 3Q24.
