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EM government debt rush before US rates rise

A rush by emerging market governments to sell debt before the US Federal Reserve further raises interest rates this year has propelled issuance in Asia to record levels since the start of January, new data shows.

Swelled by a $3bn Indonesian bond launched on Thursday, the total value of sovereign bonds sold in Asia, excluding Japan, reached $8.2bn in the year so far, up from $6.5bn in the year to March 23 last year, according to Dealogic, a research company.

The company said the Asian issuance was a record high for the year to date, making it likely that the first quarter would also register a record. Debt issuance in Europe, the Middle East and Africa, as well as in the Americas, was also at high historical levels in the year so far, Dealogic added.

“Emerging market sovereigns and corporates are keen to use the window of opportunity before US rates rise further,” said David Hauner, head of economics for eastern Europe, Middle East and Africa at the Bank of America Merrill Lynch.

“Moreover, emerging market risk premiums have also benefited from better growth and improving capital accounts,” Mr Hauner added. “During the volatility of the past years, emerging market issuers have learnt that they need to be quick to squeeze in their bonds.”

Indonesia’s issue was representative of fading perceptions of emerging market risks, analysts said. The $3bn sukuk (Islamic) bond it priced in two tranches on Thursday bore effective coupon rates of about 3.75 per cent for the five-year bond and about 4.5 per cent for the 10-year issue — significantly lower than the 8.3 per cent effective coupon on a $2.4bn sukuk it sold in March last year.

“Investors are encouraged that Indonesia has been making useful progress in shoring up its financial situation,” said Gareth Leather, senior Asia economist at Capital Economics, a research company.

The country’s current account deficit — a measure of a country’s dependency on international creditors — came in at 2.2 per cent of gross domestic product in 2016, slightly higher than the 2 per cent registered in 2015 but down from 3 per cent in 2014.

Mr Leather added that Jakarta’s fiscal position was also fairly strong, with a budget deficit at 2.5 per cent of GDP and government debt at about 20 per cent of GDP, one of the lowest levels among large emerging economies.

Emerging markets have recently been in vogue for investors, having taken a hit after the US election result in November last year. Standard & Poor’s, the rating agency, calculates that between December and the end of February, net inflows into emerging market debt has totalled $29bn and $14bn into emerging market equities.

This more than offset the impact of the so-called “Trump tantrum”, the outflows of foreign capital from emerging markets in November that followed Donald Trump’s election as US president. This episode wiped $26bn from emerging market debt and $4bn from EM equities, Standard & Poor’s said in a research note.

However, the outlook is for further volatility in flows to emerging markets, the rating agency said, as the trend of rising rates in the US diverges with a more dovish outlook at the European Central Bank.

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