Emerging markets: Fund inflows are up as sovereigns continue to sell new paper

Chicago, Jan. 20 – In the week ended Jan. 18, emerging markets bond funds were up $2 billion, a market source noted.

For emerging markets, this is the eighth inflow over the past two-and-a-half months.

A country shift is continuing, the source said, with China-specific funds posting yet another outflow in a trend that has been ongoing for around a year.

Investors are keen on Korea, though – and Korea bond funds have been popular over the last couple of months with a streak of fund inflows.

The week for global and emerging bond funds had a net $14.3 billion inflow, the largest in almost two years.

Emerging markets bond issuance has continued in a steady stream in the third week of January, with sovereigns still a major source of new paper.

Following sovereign paper has been a globally disperse group of issuers.

Eastern Europe

A deal that could be described as a blowout deal would be a two-part bond deal from the Republic of Serbia.

The orderbook on the $1.75 billion of bonds climbed as high as $11 billion with more than 500 investors expressing interest.

Deputy prime minister Sinisa Mali was happy to talk about the new bond issue, pointing out that the non-investment-grade country did as well as investment-grade-rated Hungary earlier in the month.

Taking an extra victory lap, Mali noted that Serbia’s new issue did better than recent eurobonds in U.S. dollars from both Romania and Turkey.

He also noted that Hungary and Romania are part of the European Union, while Serbia is not yet there.

Proceeds will be used for “investments in railway and road infrastructure, for the construction of hospitals and schools, and not for consumption,” he noted.

In a follow-up press release to his initial press release about the new bonds, Mali pointed out that at the end of January after a payoff for a particular debt, the public debt will decrease for Serbia to 50.2% of GDP.

The press release also noted that the dollar deal was immediately hedged into euros, since most of Serbian trade is in euros.

Well aware of problems from other nearby European nations, Serbia has been working to fight a gray economy.

Greece would be a well-known example of a cash economy that supported widespread tax evasion, which helped to lead it into a crisis and a massive restructuring of its debt and austerity measures.

Serbia is proactively fighting the gray economy and incentivizing money put into bank accounts and the digital transfer of funds, in an attempt to move it away from a cash-based economy.

The press release pointed to the macroeconomic indicators and the work Serbia has done over the past few years, like fighting the gray economy, as reasons the country has become more attractive and competitive with debt investors.

Israeli banks

Israeli issuers have been active over the past couple of weeks in the international dollar debt market, including a $2 billion issue from the State of Israel on Jan. 10 that closed this week.

Where the sovereign goes, sometimes others will follow.

Two Israeli banks did indeed soon follow, first Bank Leumi le-Israel BM with a $500 million issue that was a double-hitter: subordinated and green.

The tier 2 capital was more than 3x oversubscribed with books marked at $1.7 billion at the closing price, the bank noted in a press release.

The subordinated part is something the bank has done before, noting it was the first Israeli bank to issue tier 2 debt to institutional investors outside of Israel in 2020.

The green part is new. The bank just set up a green bond framework.

Proceeds are earmarked for eco-friendly projects, like renewable energy, green construction, green transport, waste recycling and sustainable development.

Israel Discount Bank Ltd. went a little bigger, drawing $800 million from the market on Thursday.

The spread on the investment-grade issue notched 30 basis points tighter during pricing to land at Treasuries plus 190 bps.

The 5 3/8% bonds come with a five-year tenor.

The timing proved interesting for the issuer, as the bank was ordered by the state to divest its credit card business, reported on Thursday.

The bank published the notice in a regulatory filing on Thursday morning.

On the finance ministry website, the reasoning for the decision was provided. The ministry of finance is attempting to increase competition in the market and decentralize the banking system.

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