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Could lower rates spell higher EM bond issuance?

Slow global growth, combined with uncertainty partially caused by Brexit has increased the likelihood of central banks across emerging and developed markets loosening monetary policy. The move could lead to a spate of bond issuances from the EM sphere in some cases.

Jul 4, 2016 // 5:00PM

Although Brexit caused significant market volatility, the markets have since calmed. However the risk from the UK’s break with Europe has only been postponed.

“Going forward, there are still risks due to slow global growth and the fact that Brexit has not yet occurred,” said Regis Chatellier, a senior EM credit strategist at Societe Generale.

An easing of fiscal policy is likely to take place across the whole EM space, particularly as a result of Brexit. Low growth and consequently low interest rates will make it difficult for the US Federal Reserve to raise rates.

As a result, the current environment is relatively favourable for bond supply, especially during a period of less uncertainty.

“Events could be much more complicated in 6 months if Brexit occurs, which could lead to more of a risk-off environment in the months ahead.”

As such, many issuers are likely to be looking to access the markets now.

“Supply could be substantial over the next 3 months. August is traditionally quiet for bond supply, so there will be a current window of a couple of weeks,” Chatellier noted, adding that September and October could also be busy.

Issuance would likely come from across the whole EM debt space.

“Russia could increasingly hit the markets, and many corporates have already issued.”

Sovcomflot, NLMK and Evraz all issued Eurobonds in June with sizes ofUS$750mn, US$700mn and US$500mn respectively. The Russian sovereign also issued US$1.75bn in May.

“The Middle East and Latin America could also see issuances.”

Kuwait is looking to issue US$9.95bn through dollar bonds and sukuk to finance its 2016/17 budget deficit.

However, although it is considered that after Brexit the Fed is unlikely to raise rates until 2017, the Fed could still act.

A rate hike would depend on market conditions, the Fed would not to do it in a sustainable way – it could look to make room for manoeuvre – if it were to, it would be a tactical hike.

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