After a sluggish first half, the primary bond market is showing signs of recovery as the end of the financial tightening cycle appears to be nearing, analysts say.
Primary bond issuance in Latin America and the Caribbean is poised to gain in the second half of 2023 after a slow first half, but the pace of the recovery will depend on when the US Federal Reserve stops its tightening cycle.
“We are in a spot in which we are waiting,” says Lisandro Miguens, head of debt capital markets for Latin America at JPMorgan.
“We can debate about the end of the cycle, but if it’s not the end already there could be another hike in July and most likely we should then be done with the tightening,” he adds.
The key for this is the US annual inflation rate. While the rate has been in decline for a year, dropping to 4% in May from a peak of 9.1% in June 2022, it’s not come down enough for the Fed to stop the hiking cycle. The Fed hiked its monetary policy rate by 25 basis points three times this year, taking it to 5.25%, well above the 0.25% when the tightening cycle began in May 2022. In June, Federal Reserve Chair Jerome Powell said at least two more hikes are likely to be made to bring the inflation rate down to its 2% target.
“The bigger factor for creating good or bad sentiment in Latin America is the Fed, as the tightening cycle is creating a lot of uncertainty in the credit market in general, particularly in emerging markets where it’s more frontier than high grade, more frontier than high yield,” Miguens says.
But with expectations rising of an end to the hiking cycle, more companies are once again considering when to go to the market, he adds.
“That is why the market is okay, but not great,” Miguens says. “The moment that the market sees that we are reaching the end of the [hiking] cycle and start to debate whether to stay paused or reduce rates, investors are going to be buying because they have solid cash and the absolute yields are high.”
International bond issues from Latin America and the Caribbean kicked off the year with 19 deals totaling $18.7 billion in January, before gradually coming to 18 deals totaling around $7.6 billion during the remaining two months of the first quarter. The market remained slow with only five deals in April and five more in May that totaled around $8.8 billion, according to data from Refinitiv.
There were five deals totaling $4.7 billion in the first half of June, the data show.
However, seven additional issuers went to the market as June came to an end with eight transactions that totaled around $8.1 billion. Chile and Paraguay raised $3.57 billion in the sale of euro- and US dollar-denominated bonds, while Colombian state-owned oil company Ecopetrol and Mexican telecommunications company América Móvil picked up $2.5 billion in bonds denominated in dollars and Mexican pesos, respectively.
Sergey Goncharov, head of fixed-income boutique for the Americas at Switzerland-based Vontobel Asset Management, says these latest issues were welcome after the sharp drop in deals in 2022.
“As July through August are usually dormant months, issuers tend to use this window of opportunity,” Goncharov says.
According to Miguens, the low activity in 2022 and early 2023 stemmed in part because issuers didn’t need much financing. But as 2024 approaches, “the maturity towers will start to pile up again,” he says.
“You start approaching the 2024 and 2025 maturity levels, and you start feeling the need to do something about it after not having done much in the last 18 months,” Miguens says. LF