EM Sovereign Spreads Face Pressure Amidst Surge in Issuance

EM sovereign spreads have had a bad start to the year, underperforming other credit markets. EM spreads widened back to early December levels. Arguably, they recouped a part of the strong year-end rally, but it is not the only reason. The heavy issuance has been weighing with the second heaviest start to the year over the decade. More is to come as gross issuance is forecasted to rise in 2024 to c. US $ 150bn from c. US $ 130bn (70bn of net issuance). It would be a US $ 20bn increase in net issuance with a record for IG countries.

The primary markets will remain bifurcated between IG and BB sovereigns which have access and lower-rated names where yields can be punitive. Various estimations forecast US $ 50bn of B/CCC maturing in 2024. Fortunately, the market conditions have been improving but based on history issuing at 10% would be difficult. It will require alternative financing sources coming from multilateral institutions. Overall, for the asset class, the technical picture remains fine. If coupons are re-invested by investors into the asset class, it would just require a 1% of AUM in portfolio inflows to cover the expected net issuance.