During the month of March, the capital markets faced serious difficulties linked to the conflict between Russia and Ukraine. It caused a sharp rise in inflation, especially in energy and food prices, leading to multiple hikes in policy rates and the likelihood of a faster tightening path from the US Federal Reserve.
Despite this, there was no rush to reduce exposure to riskier assets: indeed, emerging market spreads tightened during the month, and there was ample supply of new issues in over the past two weeks. Similarly, after a disastrous first quarter, particularly in the US but also globally, the IPO market is showing signs of improvement, with two large IPOs currently underway, which appear to be benefiting from a favorable response.
From 1.71% on March 1, the 10-year US Treasury yield rose to 2.51% on March 28. 10-year bonds were trading as low as -0.1% in early March, but now (March 30) they are trading at 0.64%. While two-year bonds remain at narrowly negative yields, their yield fell from -0.75% to -0.02% during the month. This implies that the stock of negative-yielding debt is rapidly approaching zero (from $4.5 trillion at the end of February and a late-2020 peak of $18 trillion).
Any new debt supply will be priced using significantly higher benchmark rates, indicating the likelihood of higher borrowing costs across the board, even when spreads remain stable.
There was huge volatility in Russian and Ukrainian spreads. Amid fears of an early sovereign default, Russia’s EMBI+ index, its average benchmark bond spread across the UST, widened less than 300 basis points ahead of its invasion of Ukraine at a high of over 6000 basis points, rallied to 2197 when pending dollar payment Coupons were first announced, then widened again to 3705 (March 24) as Russian companies faced to a technical defect. It closed on March 29 at 2561. Ukraine’s spread widened from 2929 at the end of February to 4929 but closed on March 29 at 2280. For both countries, although their spreads eased during the month of March, the prevailing margins nevertheless still imply expectations of default and capital loss.
However, the unfavorable context has not translated into a flight from riskier asset classes: emerging markets and other riskier assets showed resilience:
- Of the 19 emerging countries studied, each of the sample tightened its EMBI+ spreads between the end of February and March 29: for example, Turkey’s spread fell from 598 to 523 basis points and Poland’s spread fell from 71 to 21 basis points.
- Nigeria brought in the first sub-Saharan sovereign supply this year. It sold $1.25 billion in 8.375% seven-year debt on March 17, attracting $4 billion in peak demand.
- Turkey also sold five-year bonds. With initial price indications of 8.875% to sell, he sold $2 billion at 8.625%, indicating the deal had been underwritten three times, although he paid 7.25% in February to raise 3 billion dollars of Islamic debt over five years.
- The Republic of the Philippines placed a three-part $2.25 billion dollar-denominated issue that includes its ESG debut, a $1 billion 25-year bond doubled in size and priced at 4.2%, 50 basis points. basis in the forecast. The combined offering gained over $8 billion in demand.
- It was followed by Indonesia, which sold $1.75 billion of 10- and 30-year debt at prices of 3.6% and 4.35%, against expectations of 3.95% and 4.6%.
- Egypt also raised 60 billion JPY – the equivalent of 500 million USD – through a Samurai deal arranged by and benefiting from a credit enhancement from SMBC, priced at 0.85% over five years.
- There has also been a revival of hybrid and perpetual debt: in the week of March 25, VW, Bayer, Telia and Intesa Sanpaolo all successfully arranged hybrid or AT1 financings, with Deutsche Bank issuing a well-received AT1 on March 28.
The global IPO market had a very poor first quarter. This is evidenced by US data. According to data from Renaissance Capital, excluding SPAC, eighteen companies raised a total of $2.1 billion in the quarter, compared to 84 companies that sold $35 billion in shares in Q4 2021, and 101 companies that raised $39.2 billion in the first quarter of last year. This trend is not limited to the US market: Latin Finance announced on March 28 that 23 Brazilian companies had withdrawn from IPOs planned so far this year. According to Bloomberg, global IPO supply reached $65 billion in the first quarter, up from $219 billion in the first quarter of 2021.
On the other hand, a large IPO in the MENA region seems to be well received, and a large Indonesian offering is also progressing favorably.. The Dubai Electricity and Water Authority announced its IPO on March 24, the first of ten planned listings for public entities in Dubai. It planned to sell 3.25 billion shares at AED 2.25-2.48 each, to raise up to AED 8.06 billion (USD 2.19 billion), the largest IPO in Dubai since the IPO of DP World in 2007. On March 28, Gulf News reported that the deal was heavily oversubscribed, suggesting it was likely to be pegged at the upper end of its range and even potentially increased. Additionally, Indonesian tech company GoTo’s IPO was proposed on March 25 at IDR 338 per share, down from a range of IDR 316-346. At this level, it is expected to get IDR 16.2 trillion ($1.1 billion) in revenue.
Our point of view
March was obviously a difficult month for financial markets, and benchmark yields rose sharply to reflect the deteriorating outlook for inflation, particularly impacting energy and food prices.
Despite this, there are multiple indicators of resilience, including the tightening of EM spreads over the past month and the successful conclusion of several EM sovereign deals over the past few weeks. There was also significant supply of hybrid corporate debt in Europe and additional, well-received Tier 1 issuance for banks.
First-quarter IPO data is dire — dating back to before the Russia-Ukraine conflict — with particularly tight US supply and global first-quarter IPO sales below 30% of their 2021 level However, there are also recent positive indicators in this segment, including the seemingly positive progress of major IPOs in Dubai and Indonesia, as well as other smaller issuances.
Overall, while uncertainty remains severe, financial markets in general do not appear to be suffering from a sustained dislocation or shutdown in response to the Russia-Ukraine conflict and the official start of the rate-tightening cycle in United States.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.