Latin American sovereigns led by Mexico are expected to flock to the international bond market early next year to fund spending and refinance debt as borrowing costs ease on the prospect of falling US interest rates in 2024, according to investors and analysts.

Investment-grade sovereign issuers — those rated BBB- and above — are expected to kick off sales in the first quarter, with their BB rated neighbors not far behind, following a rally in bond markets in recent weeks, spurred on by the US Federal Reserve recent signaling that lower interest rates are coming.

“The rally in emerging markets spreads around a more dovish Fed should make it easier for Latin American issuers to tap the markets,” said Zulfi Ali, an emerging markets portfolio manager at PGIM, the investment management division of Prudential. “While lower rated countries with idiosyncratic issues may experience difficulties, BB or higher rated sovereigns should be able to access the markets with ease,” Ali added.

Mexico is expected to be first out of the gate early next year, followed by Brazil, Peru, Chile, Colombia, Costa Rica, the Dominican Republic and possibly Panama.

“Even though Hacienda has signaled more issuance in the local markets, we would be surprised if [Mexico] does not issue in the international market early in Q1,” Ali said.

Nathalie Marshik, Latin American sovereign strategist for BNP Paribas, said Chile and Peru could hold off tapping the international bond market right away due to their strong balance sheets, but they may equally decide to play it safe. “They might think that ‘okay, we are considering the potential for volatility again in 2024 if the Fed doesn’t cut rates as fast as the market wants,” she said.

QUASI SOVEREIGNS

Quasi sovereigns such as Colombian oil producer Ecopetrol and Chilean copper miner Codelco could also tap the market early next year, Marshik added.

“Thankfully the BBs and the single Bs of Latin America don’t have a major maturity wall as opposed to maybe other credits. They can hold-off should they need to or should they feel that rates are still high,” said Marshik.

Gross issuance by Latin American sovereign issuers is expected to reach $36 billion in 2024, while maturities and coupons could amount to $24 billion, said Edgardo Sternberg, an emerging markets portfolio manager at Boston-based asset manager Loomis Sayles.

“While broad emerging market sovereign gross issuance will barely cover amortizations and coupon payments, Latin America is the only region where this metric is quite positive,” he said. “If the yield on emerging markets bonds continue to fall in the first half of January 2024, as usually happens early in the year, there will be a substantial number of Latin America issuers who will want to issue bonds in the primary market.”

Uruguay and Paraguay could tap the bond market at some point in 2024, Sternberg added.

BOND YIELDS

The Federal Reserve’s monetary policy announcement triggered a slide in yields on US 10-year Treasuries to below 4% after reaching 5% in October.

Despite high yields for much of the year, Latin American sovereign issuers had positive net issuance of hard currency bonds in 2023, with around $28 billion in sales versus coupons and amortizations totaling around $20 billion, according to Bruno Rovai, a sovereign strategist at Macquarie Asset Management.

“The deteriorated external conditions did not deter sovereigns from tapping markets,” since they needed to finance their wider budget gaps, he said.