Emerging Markets Dodge Fed Tapering in Best Bond-Sale Start
Comment of the Day

January 16 2014

Commentary by David Fuller

Emerging Markets Dodge Fed Tapering in Best Bond-Sale Start

Here is the opening from this informative report by Bloomberg:

Borrowers in developing nations are flooding markets with a record amount of bonds before reductions to Federal Reserve monetary stimulus drive up funding costs.

International sales in emerging markets are up 21 percent to $55 billion this month, the busiest start to a year since Bloomberg began tracking the data in 1999. Poland is marketing $2 billion of 2024 bonds today after the European Union’s largest eastern economy raised 2 billion euros ($2.7 billion) last week. Petroleo Brasileiro SA (PETR4)Latin America’s largest oil producer, has sold the most debt among 108 issuers with a $5.1 billion offering of euro- and pound-denominated securities.

Companies and governments in developing countries are seeking to pre-empt any rise in borrowing costs that could result from the next round of tapering by the Fed, which decided in December to trim monthly bond purchases by $10 billion to $75 billion. U.S. policy makers next meet Jan. 28-29.

“Issuers want to tap the market now as they fear that Fed tapering and a rise in U.S. Treasury yields will lift their own funding costs,” Regis Chatellier, a London-based director of emerging-markets credit strategy at Societe Generale SA, said by e-mail yesterday. “They simply don’t want to take that risk. So I expect new issuance to remain strong, for now.”

David Fuller's view

The difficult credit crisis recession has been very hard on most countries but they have had several years and counting in which to refinance debt at lower levels.  With US tapering imminent, additional borrowing at lower levels is a sensible policy because no advantageous window in finance stays open indefinitely.

An important question for investors: who are the major beneficiaries of these lower borrowing costs?

The biggest winners from low interest rates, by far, are the world’s corporate Autonomies.  Many of these multinational giants had the most favourable credit ratings and were able to refinance very cheaply.  The smart ones did so for ten years or more.  This will finance much of their development costs for many years to come.  In contrast, small companies have generally been deprived of funds.

The successful Autonomies will continue to become more powerful and wealthier relative to many economies which are saddled with unemployment, welfare costs, infrastructure obsolesce, bureaucratic inefficiencies and military budgets.  

Please note: more general market comments are in the Audio.

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