Emerging markets rush to debt markets to grab risk-on moment
Some financial strategists raise their forecasts for EM sovereign debt issuance, now expecting a record year for the asset class
COUNTRIES and companies in the developing world are rushing to sell bonds at the fastest clip in at least a decade, taking advantage of high appetite for emerging-market (EM) assets to issue debt, amid what investors say could be sharper swings ahead in global debt markets.
Last week’s more than US$27 billion bond deluge included deals from Saudi Arabia, Turkey’s sovereign wealth fund and Brazilian oil giant Petrobras. The demand is such that JPMorgan strategists raised their forecasts for EM sovereign debt issuance, now expecting a record year for the asset class.
“It’s a party,” said Eduardo Ordonez, a debt portfolio manager at BI Asset Management in Copenhagen. “Seize the moment in case the risk-off mood strikes.”
Persistent inflation and greater government borrowing have roiled global debt markets, with money managers ditching bonds on concern about the UK’s fiscal outlook and France’s political instability. The sourness has also spread to Asia, with Japan’s 20-year government bond yield touching the highest level since 1999 last week.
Bonds in the US, which have whipsawed as traders fret over the US Federal Reserve’s independence and the path for interest rates amid a barrage of attacks from President Donald Trump, rallied on Friday (Sep 5) as disappointing employment data prompted some traders to bet on a 50 basis-point rate cut in mid-September.
Even as Fed chairman Jerome Powell signalled a quarter-point rate reduction when policymakers meet this month, the outlook for US rates after that hinges on risks around Trump’s policy mix, including tariffs, budget deficits and his stance on the Fed. That means the yield on 10-year notes – the benchmark for global lending in dollars – may climb, resulting in pricier debt sales for countries and companies.
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“The reason why people didn’t wait is that easing is largely priced,” Grant Webster, co-head of emerging-market sovereign debt and FX at Ninety One in London. “Who’s to say that five, 10, 20, 30-year points on the curve are really going to be lower? You just don’t know.”
EM rally
Despite the swings in so-called core markets, local debt from emerging economies is up 13 per cent this year, while dollar-denominated notes are up more than 8 per cent, according to Bloomberg indices. Both are beating developed-market debt, which is up 6.5 per cent.
The Bloomberg EM USD Aggregate Sovereign Index has given investors total returns of 8.6 per cent so far this year, rising to a record high. The average yield on the gauge is 6.32 per cent, down from 7.07 per cent at the end of 2024.
The extra yield investors demand to hold EM debt over similar US Treasuries has shrunk to 298 basis points on average, hovering near the lowest since 2019, according to a JPMorgan gauge.
The optimism is such that investors poured money into EM-dedicated debt funds for the past 20 straight weeks, adding US$1.9 billion in the week ended Sep 3, according to the latest EPFR data compiled by Bank of America.
EM borrowers are rushing in, marking the best start to September since at least 2014, according to data compiled by Bloomberg. Even Brazil, which largely relies on local markets to fund its budget, issued dollar bonds for a third time in 2025 – now its busiest year in over a decade. Year-to-date issuance stands at almost US$511 billion, the largest for the span since 2021, the data show.
Appetite for new notes has been outsized. Investors placed around US$17.5 billion of orders for Saudi Arabia’s US$5.5 billion sukuk deal. Demand for Turkey’s sovereign wealth fund’s US$1 billion bond sale outstripped supply by tenfold.
“We are running a little bit ahead of expectations, so there’s more supply than was expected,” said Aayush Sonthalia, a portfolio manager at PGIM Fixed Income. “They’re just preemptively anticipating some volatility.”
A pickup in rates volatility could not just complicate new bond sales for riskier issuers, but also make it harder to roll over outstanding debt, which could ultimately lead to another wave of busts in the developing world.
More ahead
Ninety One’s Webster still expects Indonesia, Kuwait, Oman and Nigeria to sell debt by yearend. Oil giant Saudi Aramco is planning a dollar sukuk issuance this month, while Mexico is likely to tap markets for as much as US$10 billion to fund a bond buyback for its beleaguered state-owned oil driller.
September already saw US$8.5 billion of sovereign issuance – more than half the average US$13.1 billion for the month, JPMorgan strategists Fariha Ahmmed and Nishant Poojary wrote in a note on Thursday. They forecast EM sovereign bond issuance this year could near US$240 billion, which would set a record. Lower-rated sovereigns that have regained market access may opportunistically look to tap debt investors, strategists added.
“What we seem to have is a relative period of stability,” said Arun Sai, a senior multi-asset strategist at Pictet Asset Management in London. “So it’s not surprising that people are a little bit more constructive about getting their funding needs through at this stage.” BLOOMBERG
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