Iran’s drone and missile attack on Israel this week was a moment many had been fearing since fighting broke out between Israel and Hamas in October, bringing with it the potential for escalation of the conflict. But though the headlines laid bare concerns over what comes next, emerging market bonds were surprisingly stable. The lack of panic, however, does not mean appetite for new bonds is unchanged.
That there weren't greater signs of stress in the secondary market on Monday surprised some market participants. In fact, the market was calm enough for TBC Bank from Georgia and Vakifbank from Turkey to reveal mandates for additional tier one capital (AT1) bonds, usually a bull market product.
There has been no stampede for the exit in the bond market, perhaps in part because world leaders have urged Israel, led by prime minister Benjamin Netanyahu (pictured above), to show restraint in its response; Iran said it considered the matter closed; and Israel has been vague about the nature and timing of its retaliation.
But it is hard to imagine that the seemingly worsening situation in the Middle East will not, at least for a few weeks, reduce appetite for new issues.
Obviously the issuers and their syndicates have reason to believe there is sufficient demand to sell the bonds, though how pricing will work remains to be seen.
But order books for new EM bonds this year have been driven by fickle crossover investors, showing up for the yield, not by dedicated EM funds. Issuance volumes from the CEEMEA region has broken records this year, but over the same period dedicated EM funds have suffered $9bn of net outflows, according to JP Morgan.
One EM investor said “the buy-side laughed” when they saw the two AT1 mandate announcements and called the decision to go public with them on Monday “tone deaf”. Others were less concerned.
Issuers at this juncture therefore need to proceed with caution, and especially the investment grade issuers, which previously would have attracted the crossover money looking for a yield bump versus developed markets. The investment thesis and risk/reward ratio have changed over the last few days.
On Monday, corporate bond indices opened tighter than Friday's close. Western European corporate deals were priced without problem — a 20 year Gasunie trade was tightened 40bp during syndication, achieving a subscription six times the deal size. Could it be that crossover investors have crossed back?
As the EM investor put it, issuers and their syndicates are “not selling sandwiches” here. As we have seen so many times in the last two years, especially when swathes of EM borrowers were locked out of the primary market, there is much more to assessing what investors will take down than looking at the secondary market.