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During March, capital markets have faced severe challenges from
the conflict between Russia and Ukraine. It has caused sharply
higher inflation, notably in energy and food prices, leading to
multiple policy rate increases and the likelihood of a faster
tightening trajectory by the US Federal Reserve.
Despite this, there has not been a rush to reduce exposure to
riskier assets: indeed, emerging market spreads have tightened
during the month, and there has been substantial new issue supply
during the last two weeks. Similarly, after a dire first quarter,
particularly in the US but also on a global basis, the IPO market
is showing signs of improvement, with two large IPOs under way at
present, seemingly enjoying a favourable response.
From 1.71% on 1 March, the 10-year US Treasury yield rose to
2.51% as of 28 March. The 10-year bonds traded as low as -0.1% in
early March, but now (30 March) stands at 0.64%. While two-year
bond remain at narrowly negative yields, their yield has risen from
-0.75% to -0.02% during the month. This implies that the stock of
negative yielding debt is rapidly approaching zero (versus USD4.5
trillion at end-February and a late 2020 peak of USD18 trillion).
All new debt supply will be priced using significantly
higher reference rates, indicating the likelihood of higher
borrowing costs across the board even where spreads remain
stable.
There has been huge volatility in Russian and Ukrainian
spreads. Amidst fears of an early sovereign default,
Russia's EMBI+ index, its average reference bond spread over UST,
widened from below 300 basis points prior to its invasion of
Ukraine to a peak of over 6000 basis points, rallied back to 2197
when payment of pending dollar coupons was first announced, and
then widened again to 3705 (24 March) as Russian corporate
borrowers faced technical default. It closed on 29 March at 2561.
Ukraine's spread widened from 2929 at end-February to 4929 but
closed on 29 March at 2280. For both countries, although
their spreads eased during March, prevailing margins nevertheless
still imply expectations of default and capital loss.
However, the adverse background has not translated into
flight from riskier asset classes: emerging
markets and other riskier assets have proved
resilient:
Of 19 EM countries studied, each of the sample
tightened their EMBI+ spreads between end-February and 29
March: as an example Turkey's spread eased from 598 to 523
basis points and Poland's spread fell from 71 to 21 basis
points.
Nigeria brought this year's first sub-Saharan sovereign supply.
It sold USD1.25 billion of seven-year 8.375% debt on 17 March,
attracting USD4 billion of peak demand.
Turkey also sold five-year bonds. With initial price guidance
of 8.875% for the sale, it sold USD2 billion at 8.625%, reporting
that the deal was three times subscribed, although it paid 7.25% in
February to raise USD3 billion of five-year Islamic debt.
Republic of the Philippines placed a USD2.25 billion three-part
dollar-denominated issue which includes its ESG debut, a 25-year
USD 1billion bond doubled in size and priced at 4.2%, 50 basis
points inside guidance. The combined offering gained over USD8
billion in demand.
It was followed by Indonesia, which sold USD1.75 billion of 10
and 30-year debt, priced at 3.6% and 4.35%, versus guidance at
3.95% and 4.6%.
Egypt also raised JPY60 billion - USD500 million equivalent -
through a Samurai deal arranged by and enjoying credit enhancement
from SMBC, priced at 0.85% for five years.
There has also been a revival in hybrid and perpetual debt: in
the week of 25 March, VW, Bayer, Telia and Intesa Sanpaolo all
arranged hybrid or AT1 financings successfully, with Deutsche Bank
issuing well-received AT1 on 28 March.
The global IPO market had a very poor first
quarter. This is highlighted by US data. According to
Renaissance Capital data, excluding SPACs, eighteen firms raised a
total of USD2.1 billion in the quarter, versus 84 firms that sold
USD35 billion of equity in the fourth quarter of 2021, and 101
firms that had raised USD39.2 billion in the first quarter last
year. This trend is not restricted to the US market: Latin Finance
reported on 28 March that 23 Brazilian firms have withdrawn planned
IPOs so far this year. According to Bloomberg, global IPO supply
reached USD65 billion in Q1, versus USD219 billion in Q1 2021.
By contrast, a sizeable MENA flotation appears to be
well-received, and a large Indonesian offering also is progressing
favourably. Dubai Electricity and Water Authority
announced its flotation on 24 March, the first of ten planned
listings for state-owned entities in Dubai. It planned the sale of
3.25 billion shares at AED2.25-2.48 each, to raise up to AED8.06
billion (USD2.19 billion), the largest flotation in Dubai since DP
World was floated in 2007. On 28 March, Gulf News reported that the
deal was heavily oversubscribed, suggesting that it was likely to
be priced at the upper end of its range and even potentially
increased. Additionally, the Indonesian IPO for technology firm
GoTo was priced on 25 March at IDR338 per share, versus a range of
IDR316-346. At this level it is slated to obtain IDR16.2 trillion
(USD1.1 billion) in proceeds.
Our take
March obviously has been a difficult month for financial
markets, and reference yields have risen sharply to reflect the
worsening prospects for inflation, particularly impacting energy
and food prices.
Despite this, there are multiple indicators of resilience,
notably the tightening of emerging market spreads during the last
month and the successful completion of several EM sovereign deals
in the last few weeks. There has also been a sizeable supply of
corporate hybrid debt in Europe and well-received Additional Tier 1
issues for banks.
First quarter IPO data is dire - from before the Russia/Ukraine
conflict - with US supply particularly severely curtailed, and
global first quarter IPO sales below 30% of their 2021 level.
However, there are some positive recent indicators in this segment
as well, notably the apparently positive progress with large IPOs
in Dubai and Indonesia, along with other smaller issues.
Overall, while uncertainty remains severe, financial markets in
general do not seem to be suffering from lasting dislocation or
closure in response to the Russia/Ukraine conflict and the formal
start of the rate-tightening cycle in the US.
Posted 30 March 2022 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, S&P Global Market Intelligence
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.
