Borrowers from developing countries are rushing to sell debt, capitalizing on increased investor appetite and the search for high yields.
Mexico led the way, starting the year with its largest-ever bond sale. Hungary, Slovenia, Indonesia, and Poland quickly followed suit. In just four days, governments and companies in emerging markets concluded 20 transactions worth $24.4 billion, the busiest start to the year ever recorded for issuing dollar and euro-denominated bonds from developing countries.

The early-year rush underscores the belief that interest rates are as low as they can be, especially after a bond rally in the fourth quarter reduced the average yield of emerging markets by about 150 basis points. Borrowers are not expecting an immediate Federal Reserve rate cut. Hungary issued $500 million more in bonds than initially planned, with the Hungarian minister stating, “We decided to increase the amount because we had the opportunity to do so in a favourable yield environment.”
Issuances have so far been limited to top-quality sovereign bonds.

This momentum could continue, with a pipeline including the Philippines and Kenya, as investors seek to add emerging debt to their portfolios. Global emerging market debt funds have attracted $494 million in net inflows over the past two weeks, following five consecutive months of outflows, according to EPFR global data.

Emerging market bonds posted losses last week as global assets largely retreated after a solid year-end rally, pushing the average dollar yield back to nearly 8%. This has only made them more attractive to international debt buyers, who continue to seek yield at a time when the 10-year U.S. rate has fallen back into the 4% range.
They also offer better yields than local currency emerging bonds, which, on average, yield less than one percentage point compared to Treasuries.

The bond issuance euphoria does not seem to benefit high-yield borrowers, who will face an even more challenging year as the average yield on these bonds remains above 10%, making new issuances prohibitive.

Meanwhile, the debt crisis persists. Ethiopia became the latest country to miss a bond payment at the end of last year, and long-standing negotiations on debt restructuring for Ghana, Sri Lanka, and Zambia still need to be more conclusive.
To maintain the primary market momentum, it will be necessary for transactions to perform well in the secondary market and for new economic data releases not to disrupt the market’s consensus around expected U.S. rate cuts this year.