Emerging market debt sale surge defies global turmoil amid signs of de-dollarisation

Emerging market debt sales surged to record levels in the first half of the year, with CEEMEA volumes exceeding $190 billion, defying significant global geopolitical turmoil. This robust demand is driven by cash-rich institutional investors seeking higher margins and portfolio diversification, capitalizing on favorable interest rate conditions. Notably, the period also saw nascent signs of de-dollarization, with more EM governments and corporates issuing in non-USD currencies like the euro and yen, alongside a general shift from 30-year to shorter-term debt issues due to steeper yield curves.

Analysis

Emerging market (EM) debt issuance has demonstrated remarkable resilience and strength in the first half of the year, defying significant geopolitical and economic turbulence. Debt sales in the Central and Eastern Europe, Middle East, and Africa (CEEMEA) region surpassed $190 billion, positioning the market to exceed last year's record of $285 billion, while global EM issuance grew 20% year-over-year. This surge is fueled by strong demand from cash-rich investors seeking higher margins and portfolio diversification, who have largely overlooked traditional risk-off triggers. Supply has been driven by issuers, particularly from the Gulf which accounted for over 40% of CEEMEA debt, capitalizing on favorable interest rate windows. Three key structural trends are apparent: first, a nascent but distinct shift toward de-dollarization, with sovereign and corporate issuers increasingly turning to non-USD currencies like the euro, yen, and Swiss franc to diversify funding. Second, a strategic pivot away from long-duration debt, with a marked decline in 30-year bonds in favor of shorter-term issues like three-year notes, a direct response to steeper global yield curves making long-term financing more costly. Finally, geopolitical risk is being selectively priced, with certain sectors like defense seeing heightened demand, as exemplified by Czech firm CSG's oversubscribed dual-tranche bond.

Key Decisions for Investors

• Given the robust primary market and strong investor appetite, consider maintaining or increasing allocations to new EM debt issues to capture attractive yields, but remain selective.
• Evaluate opportunities in non-USD denominated EM bonds, particularly those in euros, to align with the growing de-dollarization trend and diversify currency exposure.
• Adjust duration strategies by focusing on the shorter end of the yield curve, as the surge in three-year to five-year issues reflects a structural shift by issuers away from more expensive long-term debt.
• Re-assess geopolitical risk frameworks, as the market is demonstrating resilience and even finding specific opportunities, such as in the defense sector, amid global conflicts.