September 2, 2020 (MLN): Emerging market bond yields and credit spreads which shot up significantly during 1QCY20 i.e. the period when the covid-19 pandemic started to play out fully in emerging markets, is now returning to pre-Covid levels and in some cases, even lower than those levels.
A report by Ismail Iqbal Securities highlights that the expected reduction in covid-19 cases and aggressive response by global central banks such as quantitative easing measures (aggressive rate cuts by central banks) to help stem the fallout from the pandemic, led to sharp recovery in bond yields. Developed countries’ sovereign debt is yielding close to zero which makes the environment conducive for emerging economies having relatively stable currency outlook.
Accordingly, Pakistan has not been any exception as Eurobond yields are also back to Dec-19 levels while 10-year credit default spreads, which stepped up to 674bps in Mar-20 have come down to 462bps now (close to Dec-19 levels).
“This significant yields’ adjustments and reduction in CDS spreads have created a decent opportunity window for Pakistan to tap global bond markets”, the report underlined.
Meanwhile, it is worth mentioning that Pakistan had planned to sell sovereign bonds worth USD 3 billion in international capital markets in FY20, but the plan was shelved, probably due to expectations of hot money flows and weak investor appetite amid the pandemic.
To recall, the last Eurobond issuance transaction was conducted in 2017, wherein Pakistan successfully raised USD 2.5 billion from global capital markets by executing USD 1.0 billion 5-Year Sukuk and USD 1.5 billion 10-Year Eurobond transactions at a profit rate of 5.6 percent and 6.9 percent respectively.
With lower interest rates, limited hot money flows are expected thus, USD 1.5 billion planned Eurobond (including Sukuk) for FY21 would go through and probably at more favorable rates than past, the report pointed out.
It further underscored that if participation levels are better than anticipated, the possibility of higher money flows via international Bond/Sukuk cannot be ruled out given that one of the Sukuk issue (USD 1 billion) matured in Dec-19 and there is an upcoming maturity as well in Oct-21.
As per the report, the banking sector which holds significant quantities of Foreign bonds including GoP Eurobonds as part of their AFS investment portfolio is expected to further recover in the ongoing , as most of the unrealized losses incurred in March-20 quarter due to sharp rise in foreign bond yields have been reversed at June-20.
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