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Europe, Forex

Negative yields see record euro borrowing from emerging markets

By Karin Strohecker and Tom Arnold

LONDON, July 24 (Reuters) – Emerging market borrowers are loading up with record amounts of euro-denominated debt in anticipation of even more deeply negative interest rates and protracted easy money from the European Central Bank.

Year-to-date sales of euro-denominated debt by emerging market sovereigns were $33 billion by early July, making up about one third of all hard-currency debt sales by developing nations, according to calculations from J.P.Morgan.

Data from Dealogic shows euro debt sales by developing nations and firms amounted to $58 billion year-to-date, quickly catching up with last year’s total volume of $77 billion.

“It is quite incredible what is going on, and you see this in all these new issuances, especially the euro-denominated space,” said Marcelo Assalin, head of emerging market debt at NN Investment Partners.

“This is clearly a reflection the very ample liquidity conditions we experience right now, because of these monetary policy accommodations, and even more so for the expectations of additional monetary policy accommodation.”

A dive further below zero for Germany’s benchmark government bond yields in recent weeks has pulled not only other euro zone debt with it but even tipped some corporate ‘junk’ bonds and emerging market debt into negative yielding territory too.

Now emerging market borrowers are embarking on a fresh borrowing spree.

Euro debt on the rise interactive

Emerging market euro zone members such as Latvia and Lithuania, and those with close ties to the currency bloc such as Poland or the Czech Republic, have long been a mainstay of the euro debt market.

But recent sales have seen new names big and small pushing in. Saudi Arabia — one of the biggest issuers of emerging market debt — sold 3 billion euros earlier this months, with the issue 4.5 times oversubscribed.

Benin made its international capital markets debut in euros while the Philippines issued its first euro-denominated bond since 2009 and Egypt raised 2 billion euros.

And it looks to be a busy summer ahead.

“The fact we have such a low-yield environment is clearly encouraging borrowers to return to the debt capital market as an alternative refinancing tool for bank debt which may have been more favoured in the past two or three years,” Societe Generale’s head of CEEMEA debt capital markets Cecile Camilli said.

“Now we are seeing an increasing trend towards non-dollar bond markets,” said Camilli, who worked on the Saudi euro deal.

Dealogic data shows that euro-denominated debt sales in July made up a fifth of all emerging market corporate and sovereign bond issues — up from 14% in the past 18-months and just over 10% in 2011.

Fund managers expect frontier issuers such as Togo to sell euro bonds, with other African countries following suit.

But enticing investors to buy euro instead of dollar-denominated debt may not be straightforward.

“Liquidity is heavily concentrated in dollars, so for most investors it makes more sense to have the funds in dollars,” said Jan Dehn, head of research at emerging markets investment manager Ashmore Group.

Societe Generale’s Camilli said much depended on who was issuing, with some countries having to establish a relationship with their new euro investor base.

“They understand they have to ensure minimum liquidity in the European markets and commit to becoming a regular issuer,” she said. “Building a long term relationship with European investors involves ongoing education on credit, macroeconomy and geopolitics dynamics.”

And for investors themselves, balancing between liquidity premiums and hedging costs for dollar-based investors could put a floor under just how low euro borrowing costs could go.

“There is no free lunch,” said NN Investment Partners’ Assalin.

(Reporting by Karin Strohecker and Tom Arnold; Editing by Catherine Evans)

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